Overall confidence in the UK outlook remained extremely fragile with a continuing focus on energy prices with expectations of a major squeeze on spending. There were further concerns that the scheduled jump in energy prices would push headline inflation to at least 13% late this year which would make it even more difficult for the Bank of England to control inflation with the threat that higher interest rates will increase the risk of a deep recession. There were also major uncertainties surrounding fiscal policy with the new Prime Minister due to take office on September 5th. The lack of clarity on policy contributed to the lack of confidence in Sterling. There were fresh 2-year lows against the dollar early on Monday before a limited technical recovery.
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The Euro dipped to lows on Monday before rallying amid speculation that the ECB could sanction a 75 basis-point rate hike at the September meeting. There was fresh Euro selling above parity with the single currency settling in early Europe on Tuesday with some month-end positioning likely.
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13.00 German Harmonized Index of Consumer Prices (YoY) (Aug) Exp. 8.8% Prev. 8.5%
The US PCE prices index declined 0.1% for July with the year-on-year increase retreating to 6.3% from 6.8%. Underlying prices increased 0.1% with the annual rate declining to 4.6% from 4.8% and slightly below market expectations of 4.7%. Fed Chair Powell stated that July’s lower inflation reading was welcome but fell short of what is required before the Fed is sure that inflation is declining. He added that having benchmark rates at 2.50% is not a place at which to stop or pause the process of raising interest rates. Powell added that lowering inflation is likely to necessitate an extended period of below-par growth and there are unfortunate costs of reducing inflation but falling to restore price stability would mean far greater pain over the medium term. According to Powell, it is also likely that a tight monetary policy will be needed for some time. As far as September is concerned, Powell stated that the decision will be based on the totality of data since the July meeting. Following Powell’s comments, markets pared back expectations of a Fed Funds rate cuts in 2023 with expectations of a longer period of higher rates.
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