Sterling remained under pressure on Tuesday with a further lack of confidence in the UK outlook and important reservations over the global outlook while international equity markets remained fragile. With the dollar posting further gains, Sterling slipped sharply to fresh 2-year lows while the Euro was little changed. Sterling did manage to recover slightly later in the day as the dollar retreated and risk conditions managed to stabilise. Bank of England Governor Bailey stated that the central bank would be especially vigilant for signs of more sustained inflation pressures and will act strongly if necessary. He added that options other than 25 basis points are on the table. The rhetoric had only limited impact with markets monitoring global trends. The first round of the Conservative Party leadership contest will be held on Wednesday with some market reservations that political uncertainty over the summer will sap the ability to tackle economic difficulties, although the US data likely to have a more substantial market impact. A stronger than expected May UK GDP increase of 0.5% helped underpin the Pound on Wednesday.
Key Data
7.00 Gross Domestic Product (MoM) (May) Act. 0.5% Exp. 0% Prev. -0.3%
The German ZEW economic sentiment index dipped sharply to -53.8 for July from -28.0 previously and well below expectations of -38.3. The current conditions component also declined sharply to -45.8 from -27.6 and well below expectations for the month. The Euro-Zone ZEW expectations index also declined sharply to -51.1 from -28.0 previously. The ZEW President stated that major concerns about energy supply in Germany, ECB plans to raise interest rates and further pandemic-related restrictions in China have led to a considerable deterioration in the outlook. The Euro remained under pressure after the European open and it hit parity against the dollar for the first time in 20 years. The market was unable to push the Euro below this level and this failure triggered a limited round of short covering.
Key Data
7.00 German Harmonized Index of Consumer Prices (YoY) (Jun) Act. 8.2% Exp. 8.2% Prev. 8.2%
The US NFIB small-business confidence index retreated to 89.5 for June from 93.1 previously and the lowest reading since January 2013. Overall labour demand remained firm on the month while 34% of business owners reported that inflation was the biggest problem, the highest level since the fourth quarter of 1980. The IBD consumer confidence index edged higher to 38.5 for July from the 10-year low of 38.1 for June, but below consensus forecasts. The dollar was hampered by a fresh decline in yields. Wednesday’s US consumer prices data will be very important for market expectations surrounding Fed policy and the dollar. Consensus expectations are for the headline rate to increase to 8.8% from 8.6% with the core rate retreating to 5.7% from 6.0%. Strong data would increase fears over more aggressive Fed tightening, although there has been a decline in energy prices since the June data was compiled.
Key Data
13.30 Consumer Price Index ex Food & Energy (MoM) (Jun) Exp. 0.6% Prev. 0.6%
13.30 Consumer Price Index ex Food & Energy (YoY) (Jun) Exp. 5.8% Prev. 6%