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Weekly Market Outlook

Weekly Market Outlook: All eyes on Flash PMIs, CPI Figures and ECB Rate Hike

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Weekly Market Outlook — We’re looking at another eventful week on the data front as several countries will release flash PMI estimates for July along with the inflation figures, following a sizzling inflation report from the United States. The European Central Bank’s meeting will take place against a troubling backdrop as their currency plunge and inflation runs high, it is expected to raise rates by 25 basis points at its meeting on Thursday. 

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The Fed could raise rates by 100 bps

There will be a lot happening this week as President Biden concludes his Mideast trip as well as economic data and earnings. The week ahead will give Wall Street a better view of how quickly the economy is weakening, leading more traders to price in a recession by year’s end. 

As US inflation hit a four-decade high of 9.1% year-over-year in June, expectations that the Fed could raise rates by 100 basis points skyrocketed. After this event, the US dollar index increased to its highest level in 20 years above 109. There are, however, some downside risks associated with June’s housing data is releasing this week. There will be a release for building permits on Tuesday, followed by housing starts on Wednesday, and existing home sales on Thursday. 

There will also be important manufacturing indicators on Thursday and Friday, including those from the Philly Fed and the flash PMIs for July. It may be quieter this week as investors await the next FOMC decision on July 27, unless there are fresh risk-off episodes that drive more funds into the world’s number one reserve currency. 

ECB to raise rates by 25 bps despite weak data

In terms of the tightening race, there can be no doubt that the ECB is late to the game, but policymakers will be hoping to send the right message when they hike rates for the first time in over a decade on Thursday. A flash reading indicates that eurozone inflation reached 8.6% y/y in June, and that figure will be confirmed on Tuesday. Last month, the ECB announced a plan for a series of rate increases rather than just two, and it might hint at a 50-bps hike in September as a way to signal its intentions. 

Even if policymakers make another hawkish pivot, the Euro, which has been flirting with parity with the dollar all week, is unlikely to get much of a boost as fears about the growth outlook are weighing on it, while the USD benefits from the Fed’s even more hawkish tone and safe-haven flows. 

Weekly Market Outlook,inflation Market Analysis
S&P Global Manufacturing PMI

It may be more beneficial for the Euro if the ECB details how it intends to combat fragmentation risks in Eurozone bond markets than hints that large rate hikes are coming. On Friday, S&P Global flash PMI data for July will pose more of a threat to the Euro. Due to rising input costs and energy prices, as well as easing demand, reading may reflect a markable slowdown in economic activity in June. According to forecasts, the composite PMI will dip from 52.0 to 51.0 in July. 

The Pound may suffer from several data releases 

The UK has plenty of economic data to look forward to this week, including labour market figures on Tuesday, CPI inflation figures on Wednesday, retail sales and the flash PMIs on Friday. We will also hear from members of the MPC on Tuesday, including Governor Andrew Bailey. Several data releases could cause turbulence for the British pound. 

It was a surprise that the British economy grew in May, and the two previous months’ GDP figures were revised higher. Consequently, the Bank of England is in a position to increase interest rates much faster in August as a result of this. In spite of this, the sterling’s value against the USD has continued to slip. Aside from being severely affected by the energy crisis like the Euro area, the UK’s economic prospects have been further clouded by the latest political developments in Westminster. 

Following a 9.1% y/y increase in headline inflation in May, the Bank of England is likely to raise interest rates by 50 bps at its next meeting if another acceleration occurs. Despite this, it’s unlikely this would stop the pound from declining since stagflation fears are likely to rise. However, any upbeat readings from the other data points might provide some support. 

Bank of Canada’s 100bp hike is just the beginning 

Retail sales and CPI data are due in Canada this week, and a further rise in inflation may not provide any benefit to the Loonie. The central bank raised rates by 100 basis points on 13 July in an attempt to “front load” tightening, but an upward surprise in CPI could increase worries that it will do so again in September.  

Markets were shocked when the Bank of Canada hiked rates by a whopping 100 basis points. As a result, the Canadian dollar has plummeted to its lowest level against the greenback since November 2020. It is evident that investors are worried that frontloading rate increases could lead to a recession, even in Canada, which has one of the strongest economies in the G20. 

New Zealand to release key inflation data

Weekly Market Outlook,inflation Market Analysis
RBNZ CPI q/q

The Reserve Bank of New Zealand released its key inflation data recently. The Q2 annual inflation rate accelerated to 7.3%, while quarterly inflation rate was 1.7%. There are upside risks in the data and the RBNZ may hike rates more and more in the future. In terms of commodity-linked dollars, domestic tightening speculation will lag behind Fed concerns and general risk sentiment. Flows of international investor sentiment continue to impact the New Zealand dollar. 


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