GBP/USD rises after UK inflation hits double digits

GBP/USD rises above 1.121 after inflation jumps to 10.1% YoY in July, a fresh 40-year high and up firmly from June’s 9.4%.

·         NZD/USD rises after RBNZ hikes rates by 50 basis points

·         US retail sales are expected to rise 0.1% MoM in July after 1% gains in June

·         Could the minutes of the Fed meeting help stocks grind higher and Gold retake $1800?

European markets continued to grind higher yesterday, with both the FTSE and the DAX reaching 2-month highs, despite the deepening cost of living crisis and soaring energy prices. Investors looked past a record fall in UK real wages and German economic sentiment falling to a 14-year low.

Stocks on Wall Street were more of a mixed bag. The S&P 500 closed higher, over 4310 approaching a 4-month high after bellwether Walmart posted less gloomy than expected earnings. Meanwhile, the Nasdaq, after briefly reaching a level last seen in late April, closed lower on the day.

European stocks are pointing to a modestly higher start, and US futures are flat ahead of a busy day with central bank action, UK inflation, US retail sales, and the Fed minutes in focus.

 RBNZ rate hike

NZD/USD is on the rise after the RBNZ, as expected, hiked rates by 50 basis points overnight, taking the OCR to 3%. The central bank hinted toward more rate hikes to take the OCR to 4% but ruled out a 75 basis point move. Speaking at the post-meeting press conference, Governor Adrian Orr reaffirmed the central bank’s hawkish policy. However, he also warned about slower growth. NZD/USD trades 0.3% higher above 0.6350, although trades down 1.5% across the week so far.

UK CPI

UK inflation rose by more than expected in July to 10.1% YoY, up from 9.4% in June and well ahead of the 9.8% level forecast. The data highlights the squeeze on household incomes and piles pressure on the BoE to act more aggressively to tame runaway prices. With wages failing to keep up with soaring prices, the cost of living crisis is deepening; a recession this year is looking increasingly hard to avoid. The BoE hiked rates by 50 basis points in July, and this data pretty much cements another outsized hike in September, as 50 becomes the new 25.

GBP/USD rose to a session high of 1.2141 following the release before paring some of those gains. The pair is managing to hold above 1.21, but the next moves depend on US data and events later today.

US retail sales

Looking ahead, attention will turn to US retail sales. Despite the US falling into a technical recession in Q2 and despite persistently high inflation and record low consumer confidence, the US consumer has remained resilient. This could be thanks to the strong US labour market, which saw 500,000 jobs added in July alone. Retail sales rose 1% MoM in June, ahead of forecasts of 0.9%, and are expected to rise a more modest 0.1% MoM in July.

Fed minutes

Later in the day, the minutes from the July Federal Reserve meeting will be released and could shed more light on the central bank’s decision to hike rates by 75 basis points in July. Investors will also scrutinise the minutes for further clues as to what could be in store for the September meeting. According to the CME Fed funds, the market is pricing in a 58.5% probability of a 50 basis point rate hike and a 41.5% probability of a 75 basis point rate hike at the coming meeting. It is worth keeping in mind that the meeting took place before the release of data that showed inflation cooling.

Should US retail sales and the minutes of the Fed meeting shift expectations further towards a 50 basis point hike over a 75 basis point hike, the rise in US indices could find fresh legs. The USD could pare gains of 0.7% so far this week, and Gold could renew its climb higher towards $1800 after falling 1.3% so far this week. 

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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