Sterling edged higher after the stronger than expected GDP data for May, but the impact was short lived, especially with weak retail sales in the data and a lack of confidence in the outlook amid severe cost pressures. There were also further fears over the impact of escalating energy prices, with prices expected to increase even more sharply in October. These rate hikes would put further pressure on consumer spending, but fiscal support payments will start this month. Sterling dipped lower after the stronger than expected US inflation data, especially with a renewed slide in global equities. The potential for more aggressive central bank rate hikes undermined potential Sterling support with the UK currency retreating.
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Euro-Zone industrial production increased 0.8% for May with a year-on-year increase of 1.6% after a 2.5% decline previously. The Euro was able to make limited headway. Expectations of an aggressive Fed stance continuing to provide underlying dollar support and the Euro retreated in early Europe on Thursday. Markets will be looking to challenge parity again with ECB rhetoric also in focus.
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US consumer prices increased 1.3% for June with the headline inflation rate strengthening to a fresh 40-year high of 9.1% from 8.6% previously and above consensus forecasts of 8.8%. Energy prices increased 42.6% over the year with a 10.4% increase for food prices. The underlying rate declined slightly to 5.9% from 6.0%, but was above consensus forecasts of 5.7%. On a monthly basis, there were significant increases in the cost of new vehicles and transportation services. The stronger than expected data triggered fresh concerns over underlying inflation pressures in the economy and also increased expectations that the Federal Reserve would have to take more aggressive action to curb inflation pressures. Futures markets fully priced in a 75 basis-point rate hike for July with expectations of a rate above 3.50% at the end of 2022. There was also some speculation that the Fed would hike by 100 basis points, especially after the Bank of Canada move and the dollar posted sharp gains.
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