The market is currently factoring in the likelihood of another interest rate increase by the Bank of England in the upcoming months. This decision stems from their effort to manage persistently high inflation while also considering the potential risks of a recession. The economic data available is still quite mixed, and the overall economic outlook remains incredibly challenging. Factors such as the elevated oil prices and the weakening of the sterling are contributing to inflation, while the job market, a critical factor, continues to exhibit tight conditions.
Central banks, particularly the Federal Reserve, are maintaining their stance of keeping interest rates at higher levels for an extended period. This stance is significantly influencing market sentiment, with the possibility of another interest rate hike from the US central bank still on the table. The upcoming release of the latest US inflation data, scheduled for next week, remains a crucial factor in shaping interest rate policies.
In the Eurozone, it appears that interest rates may have reached their peak, with expectations of rate cuts being factored in for the latter half of 2024. This projection is due to the gloomy growth outlook and the real possibility of a recession in the region.
The strength of the USD continues to play a pivotal role in determining interest rate policies. This is driven by the US economy's strong performance and the prevailing risk-averse sentiment in the market. Additionally, ongoing weaknesses in China are further exacerbating these dynamics. The GBP/USD pair has dipped to new six-month lows, falling below the 1.2200 level, while the GBP/EUR pair has dropped to a two-month low of 1.1500, where initial signs of demand are starting to emerge.
Main UK data point this week is the GDP release on Thursday. In July 2023, the UK economy experienced its most significant monthly contraction of the year, declining by 0.5% compared to the previous month. This contraction exceeded the consensus expectations, which had predicted a milder decline of -0.2%. The unexpectedly sharp decline was attributed, in part, to adverse weather conditions and industrial strikes.
In the current month, market analysts anticipate a 0.1% month-on-month contraction in GDP. This projection takes into account the impact of elevated interest rates and rising living costs, both of which are putting pressure on consumer demand.
Market participants will also be tracking geopolitical developments in Israel. The outbreak of violence in Israel over the weekend has led investors to shift their focus towards safe-haven assets, increased geopolitical uncertainty tends to drive up demand for assets such as gold and the US dollar, while simultaneously bolstering interest in US Treasuries, which have recently experienced significant selling pressure.
