Published: 22/08/2022 By ECAPBank of England policy makers received an unpleasant jolt last week, in the form of a significant upward surprise in the inflation numbers for July. Both the headline and the core rate soared to fresh record highs, the former now in double digits and expected to peak at 13% in the autumn. Markets rushed to price in more hikes from the Bank of England, but the threat of stagflation meant that sterling failed to benefit and fell against both the dollar and the euro. The PMIs in the UK have held up better than in the Eurozone, suggesting a more resilient economy than is priced in at current pound levels, but this view will be tested this week when the advance August numbers are released tomorrow.
Last week was a typically sluggish summer one in the Eurozone. With little macroeconomic or policy news, the euro mostly traded down as US rates soared and sentiment towards the Eurozone economy deteriorated on soaring energy prices. While macroeconomic news out of the bloc has held up reasonably well so far under the circumstances, the jump in energy prices continues to worsen the outlook, and has helped drive EURUSD back through parity levels this morning.
Strong second tier data and a determined push back form Fed officials against any notion of a ‘dovish pivot’ drove US rates higher last week, and this in turn boosted the dollar. Last week’s FOMC meeting minutes were actually initially seen as dovish, although investors appeared to have a change of heart as focus shifted to the Fed’s comments on inflation, which indicated members saw no let up in price pressures. This week, the PMIs are released tomorrow, as elsewhere. Markets will look to the PCE inflation report later in the week to corroborate the good news from the CPI report. Regardless, it is unlikely that the Fed will be deterred from its hiking campaign and the main question for Chair Powell atr Jackson Hole will be whether 50 or 75 bp are coming in September.