Market Report - 17/07/2024
CPI print lifts Sterling to yearly highs ; Markets await ECB decision
Following another volatile day in the FX markets, and after some key risk event data being released, we have provided a brief summary below
GBP (British Pound Sterling):
The British Pound has shown resilience in today's trading session, buoyed by stronger-than-expected economic data from the UK. The latest employment figures released indicated a decrease in the unemployment rate to 3.8%, down from 4.0%. Additionally, wage growth accelerated to 4.5% annualized, surpassing market expectations of 4.2%. These positive labour market indicators suggest a tighter job market, potentially putting upward pressure on inflation.
This morning, the UK announced their latest inflation print. Market-implied expectations for a Bank of England rate cut on August 1st were at 50/50 heading into today's eagerly anticipated CPI release, and this expectation has remained unchanged following the data. This is because the three main components of headline CPI, core CPI and services CPI, all met expectations.
The ONS said headline UK CPI inflation remained at 2.0% for a second month in June, meeting expectations. Core inflation, which excludes energy and food, stayed at 3.5%, also meeting expectations. In response to these developments, the Bank of England (BoE) may consider further tightening of monetary policy to combat inflationary pressures. As a result, the GBP has strengthened against both the USD and EUR.
We have seen GBP/EUR trade at its highest point since July 2022. The daily range has been between 1.1891 – 1.1929. On GBP/USD, we have also seen yearly highs. The cable pair breached 1.30 for the first time since July 12th 2023 and remains stable just north of this level at time of writing.
USD (United States Dollar):
The US Dollar had previously strengthened off the back of robust retail sales data from earlier this week. June's retail sales increased by 0.7% month-on-month, beating expectations of a 0.4% rise. This suggests that consumer spending remains strong, contributing positively to economic growth.
Additionally, the latest CPI report showed that inflation continues to moderate, with the annual rate easing to 3.1% in June from 3.5% in May. Core inflation, which excludes volatile food and energy prices, also decelerated to 2.8%, down from 3.0%. These figures provide some relief to the Federal Reserve, which has been aggressively hiking interest rates to tame inflation. The data supports the narrative that the Fed's policy measures are starting to have the desired effect, potentially leading to a more balanced approach in future rate decisions.
Since this point, despite remaining strong against a handful of peers, we have seen the USD sold off vs the GBP & EUR. Investors and market participants will be closely watching for further economic indicators and central bank communications in the coming days to gauge the future direction of these currencies.
EUR (Euro):
On the euro, all eyes remain on the European Central Bank as we approach their next monetary policy decision tomorrow afternoon. The expectation is that the more hawkish ECB members will fight strongly against a further reduction in the bank rate, with rates likely to kept on hold tomorrow.
There is expectation for a further hike to come in September, however we have seen slightly more hawkish tones struck from President Lagarde and her ECB members, which has benefited the EUR vs the USD, taking the rate back above 1.09. Investors will keep a very close eye on the forward guidance given by the ECB tomorrow, for fresh impetus is what is expected by EUR pairs.