July Review

July was a relatively muted month in FX markets, except for a brief spike through the psychologically-important 1.30 on GBP/USD – a level not seen since April 2022.

USD

The dollar weakness over the past four months has mainly been driven by US CPI steadily dropping. July was no different, with inflation reducing to the relatively manageable level of 3.0%. Despite another US Federal Reserve interest rate rise on the 26th of July, USD ended the month 1% weaker than it started across the board.

GBP

The upward trajectory for GBP over the first half of July was halted when UK CPI also showed signs of dropping below the expected level for the first time in 5 months. The news reduced forecasts for Bank of England interest rate rises at future meetings and caused FX traders to sell off the pound.

EUR

For EUR, the ECB meeting on the 27th of July gave us further insight into monetary policy for the Eurozone, with the expectation changing to only one or two more interest rate hikes in this cycle. This disappointed EUR traders, who expected at least another four 25 basis point hikes this year, and the single currency sold off in the second half of the month to drop below 1.10 EUR/USD into the last few days of the month.

 

August Outlook

Kicking off with a bang

Looking ahead to August, we have a blockbuster start with the Bank of England meeting on Thursday, 3rd of August. 

This is the first Bank of England meeting in a long time where we are unsure of the Monetary Policy Committee's interest rate decision during the lead-up. There is an equally credible chance of seeing:

• A 50-basis point rise
• A 25-basis point hike
• No interest rate change at all

This is likely to cause some severe market volatility in the days ahead - and in the immediate aftermath of the announcement at midday on Thursday.

According to ForexFactory.com, the market expectation is another rate hike and a 7-2 vote split in favour of a raise versus holding rates steady. Bloomberg analysis also reports a 70% probability of a 0.25% rate hike showing that overall, the market is generally leaning towards rates moving to 5.25% this week.

 

Ongoing uncertainty

However, the over-arching economic narrative has started to shift, albeit marginally, leading to uncertainty going into the meeting this week. Firstly, inflation has shown signs of reducing – UK CPI dropped to 7.9% year-on-year for June after stubbornly sticking above 10% for 8 of the previous 11 months. High inflation is the sole reason the Bank is hiking interest rates, so if that shows signs of waning, there is, of course, an argument for interest rates to stop rising. 

Add to that government advisors openly warning the Chancellor of the dangers of continued interest rate rises, as it increases the likelihood of a UK recession.

The Chancellor has an even bigger headache when considering that debt payments now surpass 10% of total government income. The Bank of England has also added an extra £50bn to their projection of the cost to unwind its bond-buying programme, which the Treasury will also pick up the bill for over the next ten years.

The hope for the UK population and businesses is that inflation drops quickly, and interest rate cuts follow shortly after. After 13 years of ultra-low interest rates and inflation, this current period is a massive shock to the system of the UK economy. We hope that the Bank of England, this government, and the next after the 2024 General Election, make the right decisions in this challenging environment to get the economy quickly back on track over the next 12-24 months.

 

What else is happening?

While we might have a month off from European Central Bank and Federal Reserve meetings in August, don't expect this to correlate to a lack of activity from the two currencies. Counterintuitively, the abundance of holidays during the summer months can make the markets a little 'thinner' and more prone to volatility.

We'll be looking for the Manufacturing & Services PMI data coming out from the UK, US and EU on Wednesday, 23rd of August.

These data releases might not have been the big movers and shakers over the last year when the likes of inflation, GDP and, ultimately, interest rates were all the markets were thinking about. However, now that interest rate hikes will probably slow down and eventually stop, the market is looking for other indicators of what should be bought and sold.

Manufacturing & Services data is crucial because it's a leading indicator of the activity of the most significant sectors and gives markets an idea of sentiment and future economic performance. 

All data sourced from Bloomberg unless otherwise stated