Published: 07/07/2022 By ECAPThe pound once again traded lower against the US dollar yesterday, ending the London session around the 1.19 level. Market views see much of the weakness in sterling has been driven by the flight to safety and rising UK recession concerns more than anything else, although one could easily be forgiven for assuming that the recent sell-off has been a product of rising political uncertainty. While Boris Johnson continues to cling to power, it appears inevitable that a resignation or forced exit through another no confidence vote is imminent any day - some bookies are offering as little as a 2% chance that he survives the year.
Whilst a possible PM change is likely to dominate the national newswires, we actually see little meaningful immediate impact on GBP from the likely change in leadership. As of yet, there are no clear frontrunners to replace Johnson - Penny Mordaunt and Rishi Sunak appear to be in pole position, although bookmarks appear rather torn over half a dozen or more candidates. Until a clear favourite emerges, we won’t have any real read on potential policy implications, although regardless these changes are likely to be minor, and we think that markets will be paying much closer attention to both recession fears and interest rate expectations. As far as the latter is concerned, Bank of England Chief Economist Huw Pill said yesterday that the UK economy was set to ‘crawl’ in the coming 12 months, somewhat dampening expectations that ultra-aggressive rate hikes could be on the way during the remainder of the year.
EURUSD has headed towards parity over the past few weeks parity in the pair. This is not merely a reaction to the moves seen in the currency market in the past few days, but also a response to the broad shift in stance towards the impact of rising energy prices on the Euro Area economy. Since the middle of June, we’ve seen a stark divergence between US and EU gas prices, with the former easing and the latter rising to four-month highs. Not only does the jump in European energy prices ramp up global recession concerns, but the divergence across the Atlantic has also increased expectations that the US economy is in a better position to weather a slowdown than its Euro Area counterpart. Macroeconomic data releases yesterday supported exactly that, with a big downside surprise in Eurozone retail sales (+0.2 YoY vs. 5.4% consensus) coming in sharp contrast to a better-than-expected US services PMI (a still very healthy 55.3 vs. 54.5 expected). US labour data out in the next couple of days, namely this afternoon’s ADP employment change number and Friday’s nonfarm payrolls report, will likely be highly important for markets. Continued signs of strength here could be enough to trigger another move lower in EURUSD.