The Pound struggled with a continuing lack of confidence in the UK economic outlook against a backdrop of concerns for the global economic outlook, and international equity markets remained fragile. The dollar posted further gains to register 2-year highs against the Pound, just above the 1.1800 level. The Pound Euro rates were little changed. Sterling did manage to recover to 1.1900 later on a dollar retreat and better risk conditions.
Bank of England Governor Bailey stated that the central bank would act strongly on sustained inflation if necessary, adding that options other than 25 basis points are on the table. The comments had limited currency impact.
German ZEW economic sentiment dipped sharply, well below expectations and the current conditions component also declined sharply. The Eurozone ZEW expectations index also declined sharply. The ZEW President stated major concerns about energy supply in Germany, the ECB plans to raise interest rates and further pandemic-related restrictions in China have led to a considerable deterioration in the outlook. Ultimately, the Euro hit parity against the dollar for the first time in 19 years, but the failure to push lower triggered a round of short covering pushing it the other way.
The US NFIB small-business confidence dropped to print the lowest reading since January 2013. Business owners cited that inflation was their biggest problem. The dollar was hampered by a fresh decline in bond yields and the Euro managed to secure a further very tentative rally.
The first round of the Conservative Party leadership contest will be held today and the market foresees political uncertainty over the summer (until Sep 5th) sapping the ability to tackle economic difficulties. US data is likely to have more impact on the Sterling Dollar rates however, and today’s US consumer prices data will be very important for market expectations surrounding Fed policy and the dollar. Strong data would increase fears over more aggressive Fed tightening, although there has been a decline in energy prices since the June data was compiled.
A stronger than expected May UK GDP increase of 0.5% helped underpin the Pound this morning with a move to 1.1900 against the dollar and 1.1865 against the Euro. The Euro trades around 1.0040 against the Dollar.