IFX Market Report: Monday 15th August 2022

The United Kingdom economy contracted by -0.1% in Q2 according to data from the Office for National Statistics (ONS) on Friday. This falls in line with the Bank of England forecast of a UK recession by the end of the year, largely driven by an inflation that should reach 13.3% later this year. ONS explained that the Q2 results were in part due to Covid schemes ending, as well as the Queen’s Platinum Jubilee bank holiday and retail sales falling due to rising prices. The UK is however not in recession yet as Q1 figures saw the economy expand by 0.8%, meaning a 0.7% growth of the economy for the first half of this year.

Another reason for the shrinking economy in Q2 may be found in the slowdown in industrial production as it fell once again by -1.6% in June after falling down already by -1.7% in May. As a consequence, the trade balance deficit increased to £-22.85bn in June.

Japan on the other hand saw economic growth in Q2. Driven by solid household consumption, Japanese GDP grew by 0.5% in the second quarter. But rising consumer prices and a rise in coronavirus infections are raising fears that the second half of the year will run out of steam.  Japanese industrial production also rebounded more strongly in June than initially announced, according to revised figures, driven by the lifting of the Shanghai containment which had caused the worst fall in two years in Japanese manufacturing activity in May. This indicator rebounded by 9.2% in June over one month, after an initial estimate of +8.9%. It had tumbled by -7.5% in May.

This situation does not help to stabilize its currency, which is also suffering from the growing gap between the still ultra-accommodative monetary policy of the Bank of Japan (BoJ) and the monetary tightening at work in the other developed economies, to counter high inflation. While the central bank and the Japanese government are still refusing to raise key rates, the dollar rose to 135.19 yen mid-June, a record since October 1998. The euro was trading on at 141.51 yen.

In the United States, better than expected figures for the Michigan Consumer Sentiment boosted the greenback as the results came at 55.1 for August, better than the 52.5 expected and an improvement from the 51.5 in July.

Cable saw the dollar weaken as inflation figures remain high and a quasi-recession state already for the United States. GBPUSD opened at 1.2072 and closed at 1.2130 marking a 0.49% gain for the pound.

EURUSD followed a similar trend with a 0.76% gain for the euro. The pair opened at 1.0179 and closed at 1.0258.

GBPEUR saw small losses for the pound with a -0.27% gain over last week. It opened at 1.1855 and closed at 1.1820.

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