It is widely expected that Liz Truss will be announced as the new leader of the Conservative Party at lunchtime. The new Prime Minister will be formally installed tomorrow. There are hopes and expectations that further significant support for rising energy costs will be provided soon after. There are reports the current Chancellor has a range of proposals, which could include a complete energy price cap.
Bank of England Governor, Andrew Bailey, will appear before the Treasury Committee. He will be joined by Chief Economist Huw Pill and by the most dovish and hawkish members, Silvana Tenreyro and Catherine Mann. They will be questioned on the August decision to raise interest rates by 50bp to 1.75%. The Committee will no doubt want to hear more on the outlook for rates and the economy including inflation. Markets currently expect a further 0.5% or 0.75% rate hike at the 15th September meeting.
Given the significant uncertainty around the impact of energy prices, the pound had the biggest calendar-month fall against the US dollar since 2016. This has seen sterling fall below 1.15, despite UK rate hikes. Businesses expect inflation to remain elevated at 4.2% in three years’ time, according to the BoE decision-maker survey. The PMI and retail sales data will give a further steer on the current impact of inflation on the economy.
GBPEUR – 1.1589
GBPUSD – 1.1453
The European Central Bank will make its latest announcement on rates on Thursday. It is set to raise interest rates again after a 0.5% hike in July. This time, the debate is expected to be between raising interest rates by 0.5% or a record 0.75%.
Although Eurozone GDP growth is close to a standstill, the ECB’s focus remains on increasing inflation trends. Rate-setters will be concerned about potential second-round effects, including upward pressures spreading to services. They are concerned that medium-term inflation expectations become unanchored from the 2% target. Last week, Eurozone inflation reached a new record high of 9.1% in August with core inflation accelerating to 4.3%.
The supply of gas from Russia to Europe also remains a key concern. Wholesale gas prices are still elevated, although lower than recent highs with the EU ahead of schedule in its gas storage goals.
EURUSD – 0.9885
EURGBP – 0.8631
The US economy added a further 315,000 jobs in August. The unemployment rate, however, rose to a 6-month high of 3.7%. This reaffirms a solid labour market despite falls in GDP. The unemployment rate will be watched to see whether this rises further in the coming months. There is nothing within this data that will likely hold back the Federal Reserve from further rate hikes.
We have a quieter calendar this week in the US. The August ISM services report may see a fall after an unexpected rise in July. There are also several Fed speakers with Chair Powell at a monetary policy conference on Thursday. His recent comments on the need for restrictive monetary policy to tackle inflation have been echoed by other Fed members.
The Reserve Bank of Australia and the Bank of Canada are expected to continue the central bank theme of raising rates. The RBA is expected to raise rates again by 0.5% to 2.35%. The BoC is likely to rate rates by a further 0.75% to 3.25% after increasing rates by 1% at the last meeting.
GBPUSD – 1.1453
EURUSD – 0.9885
Do get in touch if you would like to discuss this further.
*Interbank rates correct at 7 am on the date of publishing.
