The UK economy rebounded at a slower pace than expected in July as both construction and industrial production contracted. Both GBP and the FTSE are heading higher.
· US CPI data will be the central market focus this week and could cool further to 8%
· Ukraine forces retaking key territory adds to the upbeat market mood
· EURUSD trades at a three-week high, boosted by a hawkish ECB
European markets experienced choppy trade last week but managed to end the week mildly higher after a strong rally on Friday. The FTSE ended the week 1% above 7350, while the DAX ended the week with a more modest 0.3% high, but above the key 13000.
Stocks on Wall Street also booked gains after three weeks of declines which had taken stocks close to oversold levels. Investors shrugged off more hawkish rhetoric from Federal Reserve Chair Jerome Powell. Tech led a strong rebound in stocks as investors turned their attention to US inflation data later this week. Expectations are for inflation to cool further to 8% YoY in August, down from 8.5% in July. Any signs that inflation is cooling at a faster pace could help stocks extend last week’s rally.
Inflation data will also be released from the UK. Data releases are not affected by the period of national mourning in the UK following the death of Queen Elizabeth II. However, the BoE has postponed this week’s monetary policy committee meeting, which is now set to be held on September 22nd.
Today, Europe is heading for a stronger start after solid gains in Asia. News that Ukraine has retaken key territory and continues a rapid advance in the Kharkiv region amid a collapse in Russian defences is adding to the upbeat market mood.
UK GDP
The British economy grew slower than expected in July as industrial production and construction contracted. UK GDP was 0.2% MoM in July, up from -0.6% in June but short of the 0.3% forecast.
The data doesn’t bode well for the UK economic outlook as consumers and businesses are struggling amid rampant inflation and soaring energy bills, despite Liz Truss’ energy relief package which will freeze further hikes in energy bills. That said, the freeze on energy price hikes could help the UK avoid a recession this year, resulting in a recession next year instead.
GBP/USD trades over 1.16, thanks in part to the weaker USD. The FTSE is pointing to a 0.1% rise on the open, taking the index closer to 7400.
FX
Elsewhere in the FX markets, the USD is extending last week’s selloff and trades not far from a two-week low as attention turns to US inflation data later in the week. While the market has priced in a 90% probability of a 75-basis point rate hike at the September FOMC meeting, a cooler inflation print could see aggressive Fed bets ease thereafter.
The euro is capitalizing on the weaker USD and has soared to a more than three-week high versus the greenback. A record 75 basis point rate hike, combined with ECB officials supporting more aggressive tightening, has helped the common currency higher. ECB policymakers consider that interest rates may need to rise to 2% to tame record inflation.
The weaker USD brought some respite to USD/JPY, which ended the week lower after rising to a 24-year high of 145.00 earlier last week on central bank divergence. Today, USD/JPY is heading higher after the BoJ announced that it is ending its COVID relief scheme and reiterated its commitment to maintaining ultra-low rates.
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