July 15, 2024

“Rising expectations for Federal Reserve rate cuts boosted risk appetite broadly last week, lifting most European currencies. The US data takes a backseat this week, with inflation data in the UK and an ECB decision likely to be most important for FX.”

Sam Cornford – Head of Trading

Main Headlines

US earnings season kicked off for Q2 on Friday with some of the big banks. JP Morgan’s earnings beat expectations as revenue rose 20%, driven by a resurgence in investment banking fees, mirroring a boost to Citi’s revenue, while Wells Fargo disappointed estimates for interest income and fell immediately after the release.

The British government has decided to release thousands of prisoners early to prevent an overcrowding crisis, beginning in September. Male prisons in England and Wales have only a few hundred spaces left and are set to be full within a few weeks, something that justice minister Shabana Mahmood said could lead to ‘a total breakdown of law and order’.

GBP

Sterling concluded its best two-week period since November last week, as August rate cut doubts and softer US price growth catapulted it to a one-year high. That strong momentum will be tested on several occasions this week, and it’s the services component of Wednesday’s CPI report that will be most consequential for the pound. The headline figure is expected to remain at the 2.0% target, but for a rate cut to be a real possibility on 1^st August, policymakers are going to want to see some progress in the stickiest, more persistent parts of the index. Services inflation was 5.7% in May, soundly beating market and central bank estimates. Wage growth follows on Thursday, and we get retail sales on Friday morning. Today and tomorrow are light on data, so it will be external developments guiding the pound until Wednesday’s inflation print arrives.

EUR

After a least-worst scenario in the French election put the National Assembly in gridlock last week, a period of quiet allowed the euro to capitalise on the dollar’s softening macro picture. We get some domestic data this week, however, starting with industrial production this morning, where the consensus is looking for a 0.9% contraction. Tomorrow’s ZEW sentiment index will carry more weight for the common currency, however, where we’ll look to see whether German investors can be more optimistic than expected for the 10^th month in a row. Meanwhile, traders will spend much of the week gearing up for the July rate decision on Thursday. It is widely expected that policymakers will seek to retain flexibility here, as they will want to avoid the hard signalling about the June rate cut that tied policymakers’ hands despite some still being concerned about inflationary persistence.

USD

The dollar sank for the second consecutive week as a broad weakening trend continued to build in the US economy. The labour market is back to pre-pandemic conditions, according to Fed Chair Powell, and a soft US CPI figure last Thursday kept US disinflation going. Markets were content to look through the hot PPI figure, which inched higher to 0.2% but failed to spark any recovery. USD/JPY is the pair getting the most attention at the moment, with Tokyo piggybacking on the CPI-induced weakness to prop up the yen. Today, we get the first Fed speeches since the weak June inflation report, this time from Powell and Daly. Daly last spoke of an ‘inflection point’ in the labour market given the growing risks of a more rapid rise in layoffs and unemployment, something Powell seemed to agree with at his Capitol Hill testimony last week. There have been very few clear hints towards a rate cut in September, however, and anything that sounds like an endorsement of the market’s expectations would hurt the greenback.

Markets

The S&P 500 powered through the 5,600 mark last week, mirroring strong momentum in markets across Europe and Asia. An interesting trend emerging is a rotation from the megacaps to smaller firms, and a broadening of returns, which launched the small-cap Russell 2000 to a multi-year high on Friday. The big banks kicked off the US earnings season on Friday, with JP Morgan, Wells Fargo, and Citi presenting some mixed results. Blackrock and Goldman Sachs are among those releasing figures today.

Main Economic Events (All Times CET)

4:00am: Chinese GDP
8:30am: Swiss PPI Inflation
11:00am: Eurozone Industrial Production
2:30pm: US Empire State Manufacturing Index
4:30pm: Bank of Canada Business Outlook Survey
6:00pm: Fed Chair Powell speaks
1:35pm: Fed’s Daly speaks

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