BoE to tighten, talk of Recession in US
On Wednesday, the Federal Reserve (FED) raised interest rates by 0.75% to an upper bound of 2.50%. This is an increase of 2.25% from the start of the year. The FED confirmed its view that high inflation remains the biggest risk, but acknowledged recent signs of weakness in the US economy. FED chair Jerome Powell also pointed to the likelihood of further rises in September, with 0.50% or 0.75% hikes a possibility.
Following contraction in the US economy for a second successive quarter, talk of a ‘technical’ recession is gathering pace. Policymakers were quick to point out that weaknesses are not broad-based. According to Jerome Powell, the US labour market – a key economic indicator for the US – remains strong; the significance of recent rises in unemployment claims has been downplayed. Markets expect US rates will rise further, but less than they have done previously, perhaps causing the FED to change its stance next year. US bond yields are down 0.85% from the June peak.
GBP/USD 1 Year
This week’s key event is the BoE’s policy update on Thursday, when a sixth successive interest rate hike is expected. Markets are pricing in a 0.50% increase (this would bring the interest rate to 1.75% from 1.25%), while economists have forecast a more modest 0.25% hike.
The BoE’s forecast for UK Gross Domestic Product (GDP) growth in 2022 and 2023 is also likely to be downgraded: this is partly due to rising inflation and its effect on households’ spending power.
Sterling gained 1.38% versus the euro, closing the week at 1.1909, and closed up 1.37% versus the US dollar at 1.2166. On a year-to-date basis, the pound is down some 9% against the US dollar (it opened the year at 1.3530). However, sterling’s year-to date performance against the euro remains broadly unchanged, as UK and eurozone economies battle inflation by raising interest rates. The risk remains, that further rate hikes may dampen growth.
|Pair||Last||12-month high||12-month low|
|31/07/22||China Manufacturing PMI (Jul)||50.2||50.3|
|01/08/22||EZ Manufacturing PMI (Jul)||49.6||49.6|
|01/08/22||UK Manufacturing PMI (Jul)||52.2||52.2|
|01/08/22||US ISM Manufacturing Index||53.0||52.1|
|02/08/22||EZ Services PMI (Jul)||50.6||50.6|
|02/08/22||UK Services PMI (Jul)||53.3||53.3|
|02/08/22||US ISM Services Index (Jul)||55.3||53.9|
|04/08/22||UK BoE Rate (Aug)||1.25%||1.75%|
|05/08/22||US Unemployment rate (Jul)||3.6%||3.6%|