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Friday’s blowout of US Non-Farm Payrolls data has reignited bets that the Federal Reserve will go further in its fight to bring down inflation, ramping up expectations of interest rate hiking end-points. Shorter-dated Treasury yields have retraced their highs, with the two-year yield close to 3.2% as the spread between the two and ten-year widens.

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Source: Bloomberg

The notion that the Federal Reserve will begin cutting interest rates next year has taken a back seat in the face of continued labour market strength. Bloomberg economists are warning of another upside surprise in US data when July’s Consumer Price Index print hits the tape this Wednesday. This could fuel another front-end rally in US Treasury yields and a bounce to the upside for the US Dollar.

Fed speakers appear to be singing from the same hymn sheet, with Michelle Bowman and Mary Daly the latest to emphasise the need for consistent negative moves in inflation before a policy shift is considered. The opinion that inflation is set to peak is gathering more traction as commodity prices pull back, offering some much-needed respite for stifled supply chains. However, the journey back to a 2% inflation rate seems a long way off, as wage growth threatens to entrench much of the price gains seen so far.

Bottom line: Despite recession fears and rising prices, the safe-haven status of the US Dollar, coupled with a widening interest rate differential, looks set to play into the USD strength narrative over the coming weeks and months. Still, this may not play out across all the G10 currencies as expected; strategists believe that peak Japanese Yen selling is behind us as lower oil prices look set to benefit the net importer. Elsewhere, pressure on the Pound could return this week as the UK is expected to publish more downbeat GDP data, with the $1.18 July lows on close watch for Cable.

 

The week ahead

GBP 

The Pound fell over the course of last week, which was exacerbated by Thursday's interest rate decision from the Bank of England, signalling a downbeat outlook for the UK economy. Friday's better-than-expected US unemployment figures saw Sterling fall further against the US Dollar before the weekend. If the UK GDP estimations from the BRC are released as forecasted, this could pull the British currency even lower as fears of a fourth-quarter recession mount. In addition, the Conservative Party leadership contest may introduce further political uncertainty into the mix and negatively affect the Pound.

  • Tuesday will see the release of the average yield on 30-year bonds sold at auction by the UK government. 
  • Bank of England Chief Economist Huw Pill is due to speak at a virtual question and answer session on Wednesday.
  • The UK GDP growth rate figure month on month for June will be released on Friday, with analysts expecting a negative growth reading of -1.2%, a comparatively large fall compared with the 0.5% growth from the previous month. 
  • On Friday, the Construction Output month-on-month figure will be released. A 2% drop in construction project expenditure is being forecasted. 

 

EUR

Last week the Euro fell against the Pound after a drop in Eurozone manufacturing and a decline in German retail spending combined with the consistently worsening gas crisis across Europe. This was partly counteracted by the Euro Unemployment Rate figures released on Monday, which maintained a record low of 6.6%. This week could see the Euro strengthen against Sterling as Friday's GDP data release predicts a contraction; however, the latest inflation rate reading out of the US may attract investors toward the US Dollar, consequently denting the EUR/USD currency pair. As always, eyes turn towards headlines surrounding the gas supply to the Eurozone to try and garner clues for where the Euro is headed next. 

  • The German Consumer Price Index m/m will be released on Wednesday with the expectation for July to be an increase of 0.9%, on par with that seen in June.
  • The average yield on 30-year bonds sold by the German government will be available on Wednesday. 
  • The French Consumer Price Index for July is due to be released this Friday; analysts forecast a 0.3% rise. 
  • Italian Trade Balance figures are expected for June on Friday, and despite a net import from the previous month, the forecast is for a 350m net export. 

 

USD

Friday's US jobs data resulted in strong gains for the US Dollar as the Unemployment Rate did better than forecasted and fell to 3.5%. The figures boosted speculation that the Federal Reserve will be forced to take a more hawkish stance on interest rates as investors await the crucial inflation data on Wednesday. The UK GDP figures being released on Friday as projected could see the Buck strengthen against the Pound as speculators move from Sterling to the Dollar.

  • Wednesday will see the release of the Consumer Price Index month on month for July, with only a 0.2% growth expected despite a 1.3% increase the previous month. 
  • The Producer Price Index month-on-month data is also due for release on Wednesday; the July figure increased by 1.1%.
  • Last week's Unemployment Claims figures will be available on Thursday with an expectation of 264,000 filing for unemployment for the first time last week, similar to the week before.
  • The EIA will release the weekly natural gas storage figures on Thursday.

 

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