IFX Market Report: Wednesday 20th July 2022

Reassuring news from Europe yesterday as the continent feared the Nord Stream gas pipeline would not resume amidst tensions between the EU and Russia. However, reports from Reuters suggested that Gazprom is set to resume the supply tomorrow as scheduled. A Russian retaliation on gas supplies would put the euro under more pressure on the same day the ECB is set to decide on interest rates, in a context where the euro already lost 20% against the US dollar in just a year and inflation affecting European nations in unprecedented ways.
Yesterday, the Eurozone inflation figures released showed a jump of 8.6% in a year and 0.8% just for the month of June. As the ECB is set to announce its interest rates decision tomorrow, this puts pressure on Christine Lagarde to finally raise interest rates to fight the growing inflation.

In the UK inflation climbed to 9.4% in June. CPI figures remain alarmingly high with a monthly increase of 0.8% slightly above expectations. The unemployment rate came in slightly better than expected yesterday at 3.8%, a sign that the British job market remains resilient despite inflation.

Bank of England (BoE) Governor Andrew Bailey announced on Tuesday that the central bank is considering cutting government bonds from its balance sheet by £50 billion to £100 billion within the space of a year, by combining resales of British government bonds and the cessation of reinvestment of maturing securities. The BoE stopped reinvesting capital generated by maturing bonds. The central bank had already indicated that it would give details on the "active" sales of British government bonds at its meeting on 4th of August, but this is the first time that its governor has given a figure on the potential disposals.

He also insisted the bank would “act forcefully” if it saw signs of inflation becoming embedded into the UK economy with the war in Ukraine now “the largest contributor to UK inflation by some way.” Regarding interest rates, Bailey said: ‘In simple terms, this means that a 50 basis point increase will be among the choices on the table when we next meet”. A 50 basis point increase would be the sharpest rise since the bank became independent in 1997, with a main current rate of 1.25% already the highest since January 2009.

The difficult economic situation remains the main topic in the Tory leadership race as the voting continued yesterday. The latest round saw the elimination of Kemi Badenoch while the three candidates remaining are Rishi Sunak in the lead, Penny Mordaunt in second and Liz Truss in third. The three candidates are facing a new vote today that will decide the final face-off between the last two remaining.

Cable saw the British pound keep its good momentum since Monday with good unemployment figures. GBPUSD opened at 1.1954 and closed at 1.1995 yesterday.
GBPEUR sees the euro gain momentum as markets expect the ECB to increase interest rates by 25 basis points tomorrow. The pair opened at 1.1787 and closed at 1.1725 yesterday.
EURUSD followed a similar trend yesterday with the pair opening at 1.0143 and closing at 1.0224.

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