IFX Market Report: Thursday 18th August 2022

The rise in food prices has pushed inflation into double digits for the first time in 40 years. Inflation reached 10.1% in July, the highest rate since 1982. Food and non-alcoholic drinks were the largest contributors to rising prices in July according to ONS. Average rising price for bread and cereals up by an annual 12.4%, milk cheese and eggs by 19.4%, oil and fats by 23.4%. Core inflation (excluding energy, food, alcohol and tobacco) rose by 6.2% in July. The 2-year Gilt yields went up by 26 basis points to reach 2.41% on Wednesday, their highest level since November 2008.

This new acceleration in inflation will force the Bank of England to continue its monetary tightening over the coming months, despite the 15 months of recession expected by the British economy from the end of the year according to the central bank. The BoE will become accommodative once employment becomes a bigger problem than inflation, which is not the case at the moment with unemployment remaining at 3.8%.

Inflation in the Eurozone reached 8.9% in July, up from 8.6 in June. Core CPI reached 4.0%. The monetary zone also saw a GDP growth for Q2, as growth reached 0.6% but down from the 0.7% in Q1. Like in the UK, increasing food and energy prices are the main drivers for inflation. However, news from Germany signal that the country has filled local natural gas storage facilities above 75% of the storage capacity. This is a positive sign amidst the current energy crisis and after Germany got their supply from Russia cut to 20% of the supply capacity. Chancellor Olaf Sholz’s government is targeting 85% by the 1st of October and 95% by the 1st of November.

Fed minutes from this Wednesday show that the Federal Reserves plans on increasing interest rates until inflation eases substantially. The meeting participants noted that a 2.25%-2.50% inflation range is around the neutral level that is neither positive nor restrictive on activity, but as inflation currently remains around 8.6%, well above the 2% target, interest rates should continue rising.

Cable saw the pound weakened yesterday. GBPUSD opened at 1.2095 and closed at 1.2046.

GBPEUR followed a similar trend. It opened at 1.1894 and closed at 1.1836.

EURUSD remained stable. The pair opened at 1.0169 and closed at 1.0177.

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