Weekly Brief

The dovish side of hawkish

8 minute read


Given the volatility injected into markets from all of that central bank activity last week, it was perhaps no surprise that this week has been a much quieter affair. With only a splattering of keynote central bank announcements, and a thinner macro calendar, markets have had much slimmer pickings to motivate interest, and this has resulted in far tighter ranges to be had for most of the major currency pairs. Sterling has been no exception.

On the data front, the latest UK inflation report registered another jump in headline inflation, this time moving up from 9% to 9.1% (YoY/May), with the monthly figure just beating estimates of 0.6%, at 0.7%. Whilst the general trend for inflation is clearly and frustratingly still moving higher, the mere fact that the latest headline number did not outstrip estimates, or thankfully get anywhere near the BoE’s dizzy 11% projections (just yet), helped the pound dodge a bullet on the day.

The same could perhaps be said for the latest UK PMI readings, released a day later. Whilst there has been a large contraction in the PMIs across the board recently, the key UK Services PMI (Jun) beat estimates and rose from 53 to 53.4. To complete the week, this morning’s Retail Sales have also beaten estimates, dropping by 0.5% (MoM/May), versus estimates of around -0.7%. The yearly decline came in at 4.7%, well ahead of the -5.7% expected.

Elsewhere, the latest dive into UK government debt is not one for the faint-hearted. Whilst public sector net borrowing may have declined in May, albeit less than expected (at £14bn), the government are currently paying a whopping £7.6bn a month in interest charges on all of the outstanding debt. Given that the BoE ‘only’ raised UK rates by 0.25% last week, I suspect that Andrew Bailey might be at the top of Rishi’s Christmas card list this year.

As we said at the top, the pound has remained constrained to a much tighter range. GBP/USD has steadfastly refused to return to the sub-1.2000’s again this week, maintaining a range of 1.2200-1.2300 for the most part. GBP/EUR has seen an even tighter range, keeping between 1.1572 and 1.1670. Next week, UK growth (QoQ/Q1) is the pick of the bunch for us.


Regrettably, there were no more surprise meetings from the ECB to be had this week. What we did get was another direct confirmation from madame Lagarde that the ECB will be raising Euro area interest rates by 0.25% at next month’s ECB meeting. There will Knot be any more talk of 50bps then. That is a bit of a surprise to us, given that inflation in the region looks to be just as bad as about anywhere else, and even the likes of the SNB have raised rates by 50bps recently. Of course, much of the reason for all of the front-loading by central banks on rates is with one eye on a potential slowdown, if not recession later this year, and you get the sense that the ECB could end up being late to the table once again. Time will tell.

The latest PMI readings don’t make particularly good reading for the region, with all components of the German report missing estimates, and by a fairly big margin too. The region-wide readings were similarly disappointing, with the global composite slipping to 51.9 (Jun/Prel) from 54.8, and well below guesstimates of around 54.

At the end of next week, we get the latest Euro area HICP inflation report. This may produce a ray of sunlight if the analysts have got their math correct, as a decline from 8.1% is widely expected. If correct, that would go some way to vindicating madame Lagarde’s more cautious tone.

As for the single currency, much like the pound, there has been a modest recovery through the week. EUR/USD has been over 1.0500 for the most part, but 1.0600 is proving to be a tough nut to crack on the upside for now. EUR/CHF is perhaps one exception, with the Swiss franc still reaping the benefits of that SNB rate hike, the pair has slipped back to levels last seen in March.


Fed Chair, Jerome Powell, took the 3-mile hike from the Eccles Building up to Capitol Hill this week to give a two-day testimony to the Senate Banking Committee and then the House Financial Services Committee a day later. Whilst it may have been a stretch to expect Powell to change script so close to that 75bps rate hike just last week, in the end, Powell was probably more open and outspoken than we would have imagined.

In summary, he recognised the strain that the Fed’s rate hikes are having on the more impoverished amongst the U.S consumer. Whilst admitting that the Fed will be raising rates going forward, he did say that any hikes will remain data dependent and the Fed aim to remain ‘nimble’ were there a slowdown in the economy that may cause for a pause, so to speak. He also said that the economy could be pushed into a recession. Overall, the fact that Powell was on the dovish side of hawkish gave markets a boost, and the release of his pre-prepared remarks on day one ignited a risk-on climate, with equities popping higher and in currencyland, the likes of the dollar and yen faltering. Albeit a measured decline.

Interestingly enough, the dollar index (DXY) has been gradually turning south since failing to remain above the key 105.00 region for the second time in this cycle. Whilst it is still too early for the dollar to admit defeat, a more positive risk backdrop and the possibility of bigger rate hikes from much of the ‘other’ major central banks, may be helping to level the playing field.

We have highlighted the accelerating decline in all components of the U.S housing market of late, and this week the latest Existing Home Sales followed suit, with another 3.4% decline (MoM). Today’s New Home Sales are forecast to reflect further weakening, with Pending Home Sales out next Monday. GDP (Q1) is the pick of the bunch for next week. 


Will the BoC hike rates by 75bps next month? That’s the overriding question, after this week’s Canadian data set highlighted surging inflation, backed by a resolute consumer. A 0.9% jump for Retail Sales (MoM/Apr) beat estimates of 0.8%, and that figure jumped to 1.3% once you take autos out of the equation. CPI inflation jumped to 6.1% (YoY/May) exceeding estimates of around 5.9% and well ahead of the 5.7% previously.

That could already be enough to sway the BoC to move to a bigger (75bps) hike next month, with the potential for a similar increase in September if inflation has not eased by any magnitude before then. For next week, well other than the Canada Day holiday on Friday, the latest growth figures (MoM/Apr) will be out the day before.

As for the Loonie, it has been a bit of a mixed bag, USD/CAD was on a steady decline from reaching a near 1.3100 peak last week, but having fallen as low as 1.2900, has since moved back above 1.3000. GBP/CAD continues to trade below 1.6000.AUD & NZD


The release this week of the latest RBA minutes from that 50bps hike meeting saw the RBA agreeing that further steps will need to be taken to normalise monetary conditions in Australia over the months ahead. That basically means that they are likely to raise rates again going forward. The level of those hikes is still up for debate, with the RBA leaving the door open to either a 25bs or 50bps move going forward. Part of their reasoning for the bigger hike last time round is that Australian rates are low, and they could still apply that same argument next month. This is especially the case given that the RBA have openly declared that they would prefer to front load their rate hikes, in case of any potential economic slowdown.

Next week’s Retail Sales could give us a glimpse as to whether there is any impact on the Australian consumer, although it is far too early to see any impact from the recent rate hike just yet. As for the Aussie, AUD/USD is still trading below 0.7000, and is currently lacking upside stimulus. The kiwi has followed suit, with NZD/USD slipping back below 0.6300, and remaining close to the 0.6200 region that proved to be the base of the previous decline.



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