Morning all
Hope you’re not too burnt! Straight into it today…
GBP
As per the title inflation is sitting square on 40 year highs at 9.4%, beating market expectations yesterday by 0.1%. The figure is well above the BOE’s 2.0% target and resonates with fears expressed by Andrew Bailey (head of the BoE) that “we see the balance of risks to inflation as on the upside”. This really doesn’t leave much room for anything other than a hefty interest rate rise with rumours suggesting we are set for a 0.5% hike in August.
The writing is on the wall for the for the above with fuel and food prices being the largest contributing factor to the inflation hike. Why is this so concerning? Employees will soon start to demand higher wages to combat the price of living, with bottom line profits still remaining the same. Something has to give. We haven’t even touched on issues with international supply chains of raw materials, freight rates and another ‘outbreak of covid’ in China.
EUR
On the topic on interest rates the ECB may consider raising interest rates tomorrow, the first time since 2011! ECB president, Christine Lagarde, and her team of policy setters have long hinted that the July meeting would be the one at which policy tightening would really begin. Markets are fully convinced that this time is the right one, and the expectations are getting more hawkish by the day. Yesterday, 34 basis points (bps) were being priced in; a 57% chance of a 30bps hike, and 43% chance of 40bps. Today, it has gone up to 41 bps; 87% chance of 40bps, and 13% chance of 50bps. This may leave the door open for some disappointment if the ECB doesn’t live up to the expectations so expect some volatility with what has been a very stable currency pair.
Like the BoE, the ECB may decide it is more appropriate to take it step by step, ensuring the economy can withstand higher interest rates before jumping in the deep end. Hopefully the above will entice the Cypriots to put their hard earn cash in the bank, rather than in the mattress!
USD
Against GBP the rate is still eye wateringly low. A real testament to how strong and stable the US economy is at present. My gut feeling is that we still have room to trade lower into the teens before we break into the mid 1.20’s as Autumn approaches and we have a stable government in place.
As always, here to help.