July 29, 2024

“This week’s calendar is absolutely packed with economic data releases and central bank decisions that will add an extra layer of volatility to the political and risk-based drivers already shaking up the FX markets, beginning with inflation and GDP from the eurozone tomorrow.”

Sam Cornford – Head of Trading

Main Headlines

French authorities suspect that far-left extremists were behind attacks on the rail network on the day of the Olympics opening ceremony, although evidence has not yet been presented. All trains are now running again after 800,000 people suffered disruption over the weekend.

New British Chancellor Rachel Reeves is set to accuse the previous Conservative government of pencilling in billions of pounds that it had not budgeted for, following the conclusions of an assessment on the state of public finances that was ordered when she took office. The Labour government has already declared that Britain is ‘broke and broken’ and will argue that it currently faces a $20bn hole in its finances.

GBP

A knife-edge Bank of England decision is the primary focus for sterling this week. The consensus in markets now leans slightly towards a rate cut on Thursday, despite the services inflation and wage figures in the intermeeting period doing little to support that conclusion. The hypothesis for many betting on a cut is that policymakers will be able to look through recent stickiness and lean on the assumption mentioned in June that the upside surprises were a result of annual index-linked price volatility. Few in the MPC have given their views recently, however, so the 50/50 implied probability of a rate cut reflects the significant uncertainty in the vote split. Today, we get mortgage approvals and some private lending data followed by the CBI realised sales report.

EUR

Inflation and growth are key for the euro in the coming days. Preliminary GDP data is due tomorrow morning and should show some unsurprisingly sluggish – but positive – quarter-on-quarter growth at 0.2%. Inflation data comes from Germany and Spain tomorrow and then for the entire bloc on Wednesday morning, where the consensus is looking for a cooling from 2.5% to 2.4%, alongside a resumption in the downtrend for core inflation. ECB policymakers are expecting headline inflation to float around in current ranges towards the end of the year and a decent surprise would be necessary to convince markets that we are seeing anything different.

USD

The dollar index ended last week at a marginally weaker level, with gains against the risk-sensitive G10 offset by losses against the low yielders amid a selloff in equities and an unwind of carry trade positioning. A rapid rise in the yen has now cooled, after bets on a compression of the vast rate gap to the US this week squeezed heavy short positioning on the currency and led investors out of the carry trade in droves. This dynamic pulled JPY and CHF higher as NOK, SEK, AUD, NZD collapsed. Central banks and rates are back in focus this week, however, and the macro data flow is relentless. The main highlights are the JOLTS survey tomorrow; the employment cost index and a Federal Reserve decision on Wednesday; jobless claims and the ISM manufacturing PMI on Thursday; and non-farm payrolls, wage growth, and unemployment in Friday’s jobs report. That’s quite the comprehensive check on the labour market, which Chair Powell now sees as broadly in the same condition as on the eve of the pandemic. That should be enough, as most expect, for a dovish turn in the FOMC’s policy language that sets the stage for a first rate cut in September. Investor conviction on a September move has increased even further recently, with even a small probability priced in for a 50bps cut.

Markets

The equity markets stabilised on Friday but ended the week down across the board as carry trade unwinds, political uncertainty, and a tech selloff dragged indexes lower. Japan’s Nikkei is one of the biggest losers at the moment, having shed 10% in the past few weeks as a stronger yen makes the assets more expensive and weakens exporters. The S&P 500 fell 1.5% in total last week, and earnings from around 40% of its constituents by market cap are due this week, including the likes of Microsoft, Apple, Amazon, and Meta.

Main Economic Events (All Times CET)

10:30am: UK Mortgage Approvals & Lending
12:00pm: UK CBI Realised Sales

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