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By: Enrique Diaz-Alvarez
Inflation in the US also appears not to have reached its peak in June. After this unfortunate news, the value of the dollar skyrocketed, but the euro put up a strong resistance and held on to the psychologically important parity level.
The coin briefly broke through that and managed to close the week above this level. Markets are now starting to price in the possibility of the Federal Reserve raising interest rates by a near-unprecedented 100 basis points at its next meeting. It is a bit reassuring that risk assets such as equities and emerging market currencies managed to end the week flat or slightly lower.
Economic news from the eurozone was mixed last week. The number of vehicle registrations fell sharply, but industrial production in May was a positive surprise. The markets completely ignored these second-tier reports. The focus is on two important events. The ECB will meet on Tuesday, and on the same day, the Nord Stream gas pipeline should start supplying gas again. Trading can become quite volatile as a result. The market assumes that interest rates will be raised by 25 basis points. This provides an opportunity for the ECB to surprise the markets and restore its credibility in the fight against inflation a little. Perhaps even more important than the policy change itself will be the level of unanimity on the toolkit to combat financial fragmentation – a euphemism for restarting the purchase of weak bonds from peripheral countries with newly printed euros. It will be one of the busiest trading weeks for the single currency in months.
May's economic data published in the UK last week was solid, but it didn't help the British pound much. The currency's price fell against all of its G10 counterparts last week, with the exception of the Japanese yen. Wednesday's CPIs are likely to be the highest in decades again. Combined with the 'hawkishness' that seems to be shining through in recent statements from Bank of England representatives, this would confirm our expectation that rates will be raised by a 'double' 50 basis points in August. This week's labour market report will also shed light on the extent to which there are second-round effects of inflation in wage setting. The economic activity PMI indicators will close this very busy week. The consensus is that all indicators will safely remain at levels that point to economic growth.
After last month's PCE report, hopes had been raised that inflation in the U.S. has peaked, but those hopes were dashed when the June CPI report delivered another nasty surprise. Still, we think rate hikes of more than 75 basis points are unlikely and markets are pricing in an opportunity for that. In our view, the dollar's scorching rally is starting to become susceptible to a correction in those expectations. This week, only minor figures will be published and eyes will be on other currencies, especially the euro. For a change, trading in the dollar will be determined by developments elsewhere.
About Ebury:
Ebury Makes international markets more accessible with tailor-made foreign exchange services and flexible trade credit for businesses. Ebury works with more than 12,000 organisations and carries out €12 billion in foreign exchange transactions in 140 different currencies. The company has offices in the United Kingdom, the Netherlands, Spain, and Poland. Ebury's priorities:
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
