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Pound struggles as recession fears loom

Pound struggles as recession fears loom

Economic Calendar

  • 26/07/2022: US – CB COnsumer Confidence
  • 27/07/2022: US – Durable Goods Orders MoM
  • 27/07/2022: US – Fed’s Interest Rate Decision
  • 28/07/2022: EU – German Inflation Rate YoY
  • 28/07/2022: US – GDP Growth Rate QoQ
  • 29/07/2022: EUR – GDP Growth Rate YoY
  • 29/07/2022: EUR – Core Inflation Rate YoY
  • 29/07/2022: USD – Core PCE Price Index YoY
  • 29/07/2022: USD – Michigan Consumer Sentiment

 

Overview

GBP is dropping vs USD from the psychological resistance level of 1.20, amid UK political uncertainty and worries over looming recession fears. This has offset expectations of a 50 bps Bank of England (BoE) rate hike in August, which was also underpinned by BOE Governor Andrew Bailey’s comments last week. He confirmed on Tuesday that a 0.5% percentage point rate hike is likely at the August policy meeting.

After finishing last week in a tight range above 1.0200, – EUR/USD has lost its momentum this morning and dropped below 1.0150. Safe-haven flows continue to dominate the financial markets and as a result, EUR could find it difficult to gain traction.

Meanwhile, the European Central Bank’s (ECB) decision to raise rates by 50 basis points did not secure a euro rally, leaving traders to start looking back at economic data. Data published by S&P Global last week showed that business activity in Germany slowed in early July. Commenting on the data, Chief Business Economist, Chris Williamson remarked “the eurozone economy looks set to contract in the third quarter as business activity slipped into decline in July and forward-looking indicators hint at worse to come in the months ahead.” 

 

The Week To Come

The Economic calendar is very scant for the UK this week, and will be dominated by top tier US event risks. Therefore, the political developments in the Tory leadership race will remain the most relevant for Sterling traders. By the end of the week traders could turn even more cautious, as they start to turn their attention to the August 4th BoE policy meeting before placing any bets on the direction of the £.

In a packed data week for the US, the Fed’s interest rate decision is the most crucial. A 75 bps rate hike is priced in for this Wednesday’s meeting, but all eyes will be on any indication for the same increase in September. If there are, this will reinforce the US-UK monetary policy divergence, which could continue the momentum for the dollar bulls and GBP bears.

 

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