Published: 03/07/2023 By ECAPSterling retraced part of its gains as investors seem worried that higher interest rates by the Bank of England are going to dampen economic activities in the United Kingdom. Nevertheless, sterling looks supported as inflationary pressures are stuck above 8.5% and showing no signs of easing despite the restrictive monetary policy. Looking forward, investors are shifting their focus toward global PMI numbers to assess the impact of interest rates; on that note, manufacturing PMI in the UK for June is expected to show stability but would still remain in contraction territory. Ultimately, whether the pounds rally can be sustained remains under debate as rising borrowing costs point to hardships for households and businesses. Moreover, the gilt market is also flashing warning signals, with the yield curve inverting to levels not seen in decades.
The Euro struggles to find support ahead of the release of manufacturing PMI data for most of Europe, which is expected to show this important sector remains in doldrums. Germany, the eurozone’s dominant manufacturing base, is expected to show a PMI release of 41.0 in June, a fall from 43.2 in May. Nevertheless, European Central Bank policymaker Joachim Nagel is scheduled to speak at a financial conference later today and will undoubtedly press the case for more interest rate hikes to combat inflation even as economic growth slows in the region. On another note, the euro has also been pressured by the continued riots in France, the eurozone’s second largest economy, after a police officer killed a teenager in a suburb northwest of Paris. Ultimately, as tensions across France and Europe rise and economic data continues to evidence a struggling eurozone economy, many analysts are reluctant to take a position on the bloc’s single currency until further clarity on the continents underlying economic and socio-political health.
The US Dollar edged higher in early European trade this morning, partially recovering after Friday’s losses. The dollar was hit at the end of last week by cooler than expected inflation data for May, suggesting the year-long tightening cycle by the Federal Reserve was having some impact. However, traders have been reluctant to push the greenback much lower this morning, with activity limited ahead of tomorrow’s Independence Day holiday. Moreover, plenty of important economic data due later this week could offer further clues as to whether the US central bank is likely to resume its rate-hiking cycle after pausing in June. Ultimately, the week’s main event will be Friday’s US employment report, with economists expecting the economy to have added 225,000 jobs in June, a slowing from May’s 339,000 addition, but still a healthy result. Additionally, the Fed is also set to publish the minutes of its June 13-14 meeting when it held rates steady after 10 straight rate hikes.