IFX Market Report: Wednesday 28th July 2022

The Fed is set to unveil another big rate hike today as signs of an economic slowdown grow. Last quarter GDP fell by -1.6% and inflation reached 9.1% in June. Bond yields have also been rising substantially since the beginning of the year for the 2-year and 10-year US Treasury notes. The rate hike is expected to be 75 basis points, but a 100 basis points is on the cards.

The euro posted losses on Tuesday with its biggest drop in two weeks, as cuts in Russian gas supplies sent energy prices soaring. The European currency fell over 1% to $1.0114, the biggest drop since July 11, and was flat at $1.0130 in early Asian trade this morning. Europe's growth remains vulnerable to Russian gas supplies, which have become a major risk since the start of the war in Ukraine. Supply on the Nord Stream gas pipeline, which connects Russia to Germany, fell on Tuesday to 20% of its capacity from an already low level of 40%. Germany’s Economy Minister branded the cuts as a “gas war” with Europe. The EU agreed yesterday on a voluntary cut by 15% of gas consumption, with the exception of Hungary which labelled the goal “unrealistic”.

In the United Kingdom, high inflation is expected to have a toll on growth next year, with the UK set for the slowest growth of G7 countries in 2023 says the IMF. UK growth has remained relatively strong this year compared to other G7 countries, with a 0.4% growth in June compared to the -1.6% contraction in the US economy. However, inflation is rising faster in the UK than it is in Europe or the US and “a tighter monetary policy will have real economic costs, but delaying it will only exacerbate the hardship” says the international lending body.

Cable saw small losses yesterday. GBPUSD opened at 1.2043 Monday and closed at 1.2025 on Tuesday.

GBPEUR saw euro losses as the pair rose by 0.91% over Russian gas cuts in the EU. The pair opened at 1.1782 and closed at 1.1885 last week.

EURUSD saw a similar situation with the pair falling by -1.04%. The pair opened at 1.0220 and closed at 1.0114 yesterday.

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