On July 23rd, data released by the UK's Office for National Statistics on Wednesday showed that the UK's Consumer Price Index (CPI) rose by 2.6% year-on-year in June, marking the lowest level since March of last year. This figure was lower than the 2.8% year-on-year increase recorded in May and also below the average economist forecast of 2.7%. A de-escalation in US-Iran tensions in June led to a decline in international oil prices, which in turn pushed down petrol and diesel costs. Weekly data published by the UK government indicates that the current retail price of petrol in the UK has fallen to around 152 pence per litre, a drop of approximately 4% from the peak seen in late May. Prices for food and non-alcoholic beverages also exerted downward pressure on inflation. Meanwhile, the services inflation rate, which the Bank of England closely monitors as an indicator of domestic price pressures, slowed from the previous 3.7% to 3.6% in June, although it remained slightly above market expectations. The cost of living is a primary concern for the new UK Labour government. New Prime Minister Keir Starmer has pledged to provide more "breathing space" for British households. Among his first policy actions as Prime Minister, he announced the removal of Value Added Tax (VAT) on household electricity bills starting in October. The UK government estimates this measure will reduce the overall inflation rate by approximately 0.1 percentage points.
Additionally, with the meeting just days away, significant divergence remains in the market regarding whether the Federal Reserve will raise interest rates this month, a situation that has been relatively rare in recent years. The interest rate swaps market currently indicates traders assign about a 30% probability to a 25-basis-point rate hike announcement by the Fed on July 29th, with a roughly 70% chance of rates remaining unchanged. Market analysts suggest that such pronounced expectation splits on the eve of a policy meeting may become a new normal in the post-forward guidance era. Jim Bianco, President and Macro Strategist at Bianco Research, stated that the removal of forward guidance means the market will frequently see probabilities of 20%, 30%, or even 40% for rate hikes or cuts, reflecting investors' adaptation to the Fed's new communication approach. Compared to traders, economists' views are more aligned. A survey showed that all 76 economists polled expect the Federal Reserve to maintain the federal funds rate target range at 3.5% to 3.75% during its July 28-29 meeting.
Key data to watch today includes the US Initial Jobless Claims for the week ending July 18th, Canada's Retail Sales Month-over-Month for May, and the preliminary Eurozone Consumer Confidence Index for July. Furthermore, the European Central Bank's interest rate decision scheduled for later today warrants close attention.
US Dollar Index
The US Dollar Index experienced a choppy decline yesterday, ending the day slightly lower. It is currently trading around the 101.10 level. Apart from profit-taking exerting some downward pressure, a perceived easing in Middle East tensions dampening safe-haven demand for the dollar was a primary factor weighing on the index. However, renewed expectations for Federal Reserve rate hikes limited the extent of the pullback. Focus today is on resistance near 101.50, with support around 100.50.
Euro/US Dollar
The Euro traded higher in a volatile session yesterday, closing with modest gains. It is currently trading around the 1.1420 level. Besides short-covering providing some support, the US Dollar Index weakening due to reduced safe-haven demand and profit-taking also contributed to the Euro's rebound. Furthermore, expectations for a European Central Bank rate hike in September offered additional support. Focus today is on resistance near 1.1500, with support around 1.1350.
British Pound/US Dollar
The British Pound traded in a consolidative pattern yesterday, ending the day with marginal gains. It is currently trading around the 1.3380 level. Short-covering provided some underpinning, and the US Dollar Index's weakness stemming from profit-taking and cooling safe-haven demand also lent support to Sterling. However, overall soft economic data released from the UK during the session limited the pair's upside. Focus today is on resistance near 1.3450, with support around 1.3300.
Comments