Confidence drops as interest rates rise

GBP

Pound jumps as BoJo resigns

The Pound began last week on the back foot, falling an initial 1.1%, before erasing all losses on Thursday as British Prime Minister Boris Johnson finally announced his resignation. This followed a string of political scandals and subsequent Conservative Party resignations, with the PM facing significant pressure to step down. The Pound jumped 0.8% against the US Dollar on the news. Johnson said he would leave his position in October, despite former Tory PMs agreeing to say goodbye to No. 10 as soon as a replacement could be found. The party now faces a leadership contest, aiming to shorten the PM’s timetable for leaving office. This week is another quiet one for economic data in the UK. However, Bank of England Governor Andrew Bailey will speak about the economic landscape at an event in London tomorrow at 6PM. Markets will watch his comments closely for any clues on future monetary policy ahead of the central bank’s next meeting in early August. Wednesday will see the latest UK GDP growth data print, with the three-month average for May forecast to show a slip to 0.1%. This would mark the fourth consecutive fall for the growth measure.

EUR

‘On the edge of recession’

Last week, the Euro came close to hitting parity with the US Dollar for the first time in two decades; the pair fell as low as 1.0072 on Friday before recovering back to around 1.02 to end the week. The threat of a downturn has become a serious concern for the region, with Goldman Sachs warning that the Eurozone was ‘on the edge of recession’. Meanwhile, the European Central Bank’s meeting accounts for June were released, revealing that some policymakers expressed their belief that the central bank would need to raise rates more aggressively than initially planned. Looking ahead, the European Commission’s updated economic forecasts for EU member states are set to be released tomorrow. The previous Spring forecasts were dominated by the impact of Russia’s war against Ukraine, and economic headwinds have only intensified since then. The EC’s Summer forecast release will be followed by ZEW Economic Sentiment Index readings for July in both the Eurozone and Germany. This comes ahead of the next monetary policy announcement on the 21st of July, which will reveal more about the ECB’s future path of monetary policy.

USD

Labour data delivers

It appears nothing can put an end to the US Dollar’s latest rally, with the world’s reserve currency strengthening to levels not seen since the very beginning of the Covid-19 pandemic. On a trade-weighted basis, the greenback has risen nearly 16% since June 2021 as investors seek safe-haven assets while global risks mount. The American economy added 372K payrolls in June of 2022, much better than market forecasts of 268K and only slightly below a downwardly revised 384K in May. The US also maintained its historically low Jobless Rate of 3.6%. Meanwhile, the countdown is on to the next Federal Open Market Committee meeting happening later in July. There, the Federal Reserve is set to undertake an aggressive approach to tightening monetary policy, having issued the first 0.75% rate rise since 1994 last month. This week, a range of high-tier US ecostats will be released. On Wednesday, the latest inflation data for June will print, followed by Thursday’s Producer Price Inflation Index, and Friday’s Retail Sales figures and preliminary Michigan Consumer Sentiment reading for July.

AUD and NZD

Confidence drops as interest rates rise

The Pound to Australian Dollar exchange rate ended the week around 1.2% lower than it started, and, compared to other G10 currencies, the Aussie Dollar had the best week versus the US Dollar. Last week, the Reserve Bank of Australia raised its cash rate by 50 basis points to 1.35%, the highest rate since May 2019. Global supply chain problems and high energy costs have been driving inflation in the country, and the central bank has now raised rates three consecutive times in an attempt to get it under control. Final Retail Sales figures also printed in line with expectations at 0.9% for May. However, the same month’s Building Permits surprised markets, with the figure coming in at 9.9% despite expectations of a -1.8% reading. This week in Australia, the Westpac Consumer Confidence Index for July will be released on Wednesday, followed by the latest labour data on Friday. The country is experiencing record lows in its Unemployment Rate after a strong recovery from the global pandemic. However, there are concerns over how sustainable this success can be as recession risks take hold.

The Sterling to New Zealand Dollar exchange rate traded flat on the week, last week, with the Q2 NZIER Business Confidence Index reflecting a deteriorating economic outlook as businesses face higher operating costs and increasing interest rates. The -65% reading marks the lowest level of business confidence since the first quarter of 2020, when the pandemic was declared. This week could see a continuation of the Reserve Bank of New Zealand’s rate-hiking pattern, with the central bank expected to announce another 50-basis-point rise, bringing the headline cash rate to 2.50%. Some mid-to-low-tier ecostats will bookend the announcement, with Visitor Arrivals and the Food Price Index due out early in the week and the BusinessNZ Manufacturing Index set to print the day after the RBNZ’s release. 

CAD
BoC set to hike again

Last week in Canada, the Ivey PMI failed to meet its projected increase from 72.0 to 74.0 and instead dropped to 62.2. On Friday, data showed that the economy shed 43,200 jobs in June, but still posted an Unemployment Rate that unexpectedly fell to a fresh low of 4.9%. The Pound to Canadian Dollar exchange rate traded flat (0.1% lower) in the last week, as the Canadian Dollar fell toward a year-to-date low against the US Dollar on Friday after the miss in labour market data. Still, the Pound also dropped by a greater amount on the week due to political turmoil in the UK government. A tighter labour market could increase pressure for a significant interest rate hike in this week’s bank of Canada monetary policy meeting. The overnight rate is set for a rise up to 2.25% in Canada’s Wednesday session, according to forecasts. The announcement will be followed by a press conference, the tone of which could create volatility for the Loonie.