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UK inflation expected to have slowed in July

European markets had a poor session yesterday, sliding sharply to their lowest levels in over a month, on the back of concerns over the Chinese economy, and a sharp slowdown in domestic demand.

US markets also tumbled for the same reason, although banks also got hit on the back of a warning from ratings agency Fitch that it may have to downgrade the whole US banking sector, including the likes of JPMorgan Chase if financial conditions worsened.

Asia markets have continued this trend of market weakness, with the result we can expect to see a lower open for European markets.

The pound had a decent day yesterday, buoyed by the stronger than expected wages data, raising the question as to whether the Bank of England will be forced to hike rates again in September?

Yesterday’s wages data, which saw a record increase of 7.8% for the 3-months to June, has not only given the central bank a headache, but it could end up giving the UK economy a migraine if the bank gets its policy response wrong.

For several months now we’ve had to contend with tone-deaf warnings from the likes of Governor Andrew Bailey and chief economist Huw Pill for workers not to ask for pay rises.

This warning has fallen on deaf ears, and rightly so, but such is the mindset of the stewards of monetary policy they seem unable to grasp that this as a good thing and is certainly no wage-price spiral. If anything, this is a consequence of the central bank’s failure to grasp the inflation nettle over a year ago, when a lot of people were telling it to hike faster and harder.

What is happening now is that wages are recouping some of the real income loss that consumers have had to bear over the last 15-months, which is no bad thing for longer term demand considerations.  

Today’s UK CPI numbers will be the first to include the new lower energy price cap, with the inflation report for August also expected to point to weaker price growth.

With several MPC members already saying that interest rate policy is already restrictive, even allowing for yesterday’s wages numbers, there is a case for making the argument that we should be close to being done on the rate front, even though markets aren’t currently pricing that.

We’ve already seen a sharp fall in headline CPI from 8.7% to 7.9% in June which offers hope that we can expect to see a fall below 7% in today’s July numbers to 6.7%, with core inflation set to slow to 6.7% from 6.9%. On a month-on-month basis we are expecting to see a decline of -0.5%, as the effects of a lower energy price cap show up in the numbers.

This welcome convergence between wages and prices is long overdue and will help consumers reset their finances at a time when interest rates are still rising, and the lag effects of previous rate hikes have yet to be felt. There is also the risk that in raising rates further the MPC will push rents higher, and thus make inflation stickier.

The MPC needs to look ahead to what is happening with PPI which is expected to see further declines in July with both input and output prices expected to decline by -2.8% and -1.3% respectively.

The latest iteration of EU Q2 GDP is expected to show that the economy remained in expansion of 0.3%, although these numbers were flattered by a big gain of 3.3% in the Irish economy, compared to a -2.8% contraction in Q1. These swings tend to be due to how the big US multinationals which are based in Ireland book their sales which obscures how well or not the Irish economy is performing on an underlying level.

We’ll also get an insight into the deliberations at the most recent Fed meeting after the US central bank raised rates by 25bps at the July meeting after pausing in June.

There were no real surprises from the statement or for that matter from chairman Jay Powell’s press conference, as he reiterated his comments from June that additional rate rises will be needed, although he also insisted that the Fed would be data dependant. In the statement it was restated that inflation remained elevated, and that the committee was highly attentive to the risks that prices might remain high.

Powell was non-committal on whether the Fed would raise rates again at its next meeting in September, merely restating that if the data warranted it the central bank would do so. Recent commentary from several FOMC policymakers would appear to suggest growing splits between those who think that a lengthy pause is appropriate now, and those who want further tightening. It will be interesting to see whether these come to the fore in the minutes given how they are already manifesting themselves in recent commentary.

Hawks like Fed governor Michelle Bowman continues to push the line the Fed needs to do more, contrast with those like Atlanta Fed President Raphael Bostic who think the Fed needs to pause.

EUR/USD – slid below the 50-day SMA earlier this week falling to the 1.0875 area before rebounding. The main support remains at the 1.0830 area and July lows. Still feels range bound with resistance at the 1.1030 area.

GBP/USD – got a decent lift yesterday after slipping to the 1.2615 area on Monday but continues to find support above the 1.2600 area. A break below 1.2600 targets 1.2400. Until then the bias is for a move back above the 1.2800 area through 1.2830 to target 1.3000.    

EUR/GBP – continues to slip back from the recent highs with the 100-day SMA acting as resistance at the 0.8670/80 area. A sustained move below support at the 0.8570/80 area opens the risk of a move towards the 0.8530 area. Above the 100-day SMA targets the 0.8720 area.

USD/JPY – continues to edge higher, with support now at the 144.80 area. The move above the previous peaks at 145.10, opens the prospect of further gains towards 147.50.


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