Markets more reactive to data.

Investor sentiment was holding a positive tone for much of last week. This was reflected in solid gains on equity markets. A key factor behind the improvement in risk appetite was inflation data from the US economy. The data showed an unexpected easing in inflation in July for both the consumer and producer sides of the economy. This included the headline CPI rate falling to 8.5% down from 9.1%.

The data also had a dampening impact on the dollar. EUR/USD traded to a high of $1.0368 in the immediate aftermath of the CPI data. However, there were a number of Fed officials speaking following the CPI release, giving a hawkish tone and cautioning against reading too much into one month’s data. Thus, markets still continue to expect US rates to rise to above 3.5%.

The ECB is set to deliver further rate hikes over the remainder of 2022 should prove beneficial for the Euro. However, the war in Ukraine is likely to continue to pose a risk for the euro, especially if there are further major interruptions or a complete cessation of gas supplies from Russia. This could lead to gas rationing and power cuts in the Eurozone this winter, with the accompanying increased risk of a recession as output declines.

This week, there is a busy data schedule ahead in the UK, including updates on the labour market and inflation. Labour market conditions are tight. The consensus is for the unemployment rate to remained unchanged at 3.8% in June, while underlying average earnings are forecast to continue trending upwards to 4.5% y/y. In terms of inflation, headline CPI jumped to 9.4% y/y in June, its highest level in over 40 years. The core CPI rate edged slightly lower to 5.8% from 5.9%. Both rates are projected to rise, to 9.8% and 5.9%, respectively, in July. Elsewhere, having declined by 0.1% in June, and by 1.2% overall in Q2, retail sales are expected to move lower again a the start of Q3, with a 0.2% fall penciled in for July

In the US, retail sales data will also feature. They are projected to rise by 0.2% in July, having risen sharply by 1% in June. Meanwhile, industrial production, which has performed quite strongly so far in 2022, despite on-going supply chain issues, is forecast to rise by 0.3% in July.