BoC hikes interest rates to 2.50%

GBP

Tory leadership race heats up

The Pound fell steadily throughout the week amid a poor macroeconomic backdrop and political uncertainty. Last week, Rishi Sunak, Penny Mordaunt, and Liz Truss emerged as the top three frontrunners in the race to be the leader of the Conservative Party and the next British Prime Minister. When discussing economic policy in the UK, Mordaunt advocated for breaking up the Treasury and placing control of major economic decisions in the PM’s remit. Truss has suggested that the debt amassed during the pandemic should be financed by more borrowing to allow for tax cuts as Britons battle with a cost-of-living crisis. There are a number of influential economic data releases ahead this week in the UK. Labour market figures will be among the first to print, followed by the Gfk Consumer Confidence survey and services and manufacturing data. However, the headline event will be the printing of June’s Consumer Price Index figures on Wednesday, where yet another inflationary increase is expected for the year-on-year reading.

EUR

First rate rise in 11 years

Following multiple tests of parity, the Euro to US Dollar exchange rate broke through this significant level to reach a low of $0.9954 last Thursday, only to emerge back above the $1.01 level in early trading today. Last week, the ZEW Economic Sentiment Survey for the Eurozone fell from -28 in June to -53.8 in July, showing an increasingly pessimistic outlook among EU households. In the week ahead, the Eurozone will print final inflation readings for June, with flash Consumer Confidence data to follow on Wednesday. Finally, Thursday is set to see the first European Central Bank interest rate rise in just over a decade. The ECB has signalled its intention to hike rates by 0.25% in the upcoming monetary policy meeting as it moves toward a more aggressive approach. However, the door is still open for a larger increase. With inflation in the Eurozone currently reading 8.6%, policymakers are concerned that consumer prices could become entrenched far beyond the central bank’s 2.00% benchmark inflation rate. As usual, a press conference will follow the ECB decision on Thursday evening, and the S&P Global Services and Manufacturing figures for the EU will print on Friday.

USD

Expectations climb higher

The US Dollar Index has fallen 0.50% so far today as markets scale back expectations of a 1.0% interest rate hike by the Federal Reserve. Last week, the US Consumer Price Index surprised markets by jumping from 8.6% to 9.1% year-on-year in the month of June. The figure beat the forecasted 8.8% to extend its 40-year high. This turn of events has heightened pressure on the Fed, with some suggestions that a 1.0% interest rate hike could be a possibility at the upcoming policy meeting. However, one official played down the likelihood of a move that aggressive. This week, no major ecostats will be released, but a range of housing data will hit US markets alongside the latest jobless figures. Flash S&P Global Purchasing Managers’ Index data for services and manufacturing will be released on Friday, closing the week.

AUD and NZD

Central banks in focus

The Australian Dollar fell to fresh lows against the US Dollar last week, as the Westpac Consumer Confidence Index printed its eighth drop in as many months—matching pandemic lows. Increasing interest rates against a backdrop of rocketing prices are weighing on households. Meanwhile, the Australian Unemployment Rate posted fresh lows, down from 3.9% in May to 3.5% in June. Westpac trimmed bets on Reserve Bank of Australia interest-rate increases, while a fall in iron-ore prices also affected the Aussie. This week, the latest RBA meeting minutes will be posted on Tuesday, followed by a speech from the central bank’s Governor, Philip Lowe on Wednesday. Meanwhile, New Zealand’s central bank increased interest rates from 2.0% to 2.5% in line with forecasts last week. However, the Kiwi didn’t benefit much from the 50 basis-point rate hike as markets had already priced it in. RBNZ will release its Statement of Intent for the next three years in its session this Friday. Like Australia, inflation levels in New Zealand have also been surging, with last week showing that Q2 consumer prices rose from 6.9% to 7.3%, bypassing the 7.1% economists had forecast.

CAD
BoC hikes interest rates to 2.50%

The Canadian Dollar moved higher last week as the Bank of Canada hiked interest rates by a full percentage point from 1.50% to 2.50%, despite expectations for a smaller rate increase to 2.25% this time around. This took the Sterling to Canadian Dollar exchange rate to its weakest level since 2013. Alongside the rate announcement, Governor Tiff Macklem stated that ‘an increase of this magnitude at one meeting is very unusual. It reflects very unusual economic circumstances: inflation is nearly 8%—a level not seen in nearly 40 years’. This week on the Canadian economic calendar, Wednesday will see the latest inflation readings print with expectations for an increase from 7.7% in May to 8.3% in June. New house price data for the month of June and Retail Sales for May will also be released in the week ahead amid the ongoing global cost-of-living crisis.