Data suggests Germany is on course to pass inflation peak

GBP

After the Bank of England Governor Bailey’s speech yesterday, markets are projecting the BoE is likely to hike rates again in August by a further 25 basis points with the ambition to tackle the soaring inflation in the UK. Although money markets have priced in a 25 bps hike, they also believe there’s a 72% chance of a 50 bps increase if we see the BoE take a more aggressive approach. As a result we may see Sterling gain some ground.

Six out of nine Monetary Policy Committee members voted for the 25 bps hike leading to a fifth consecutive raise. The BoE is forecasting the inflation rate to surpass 11% by October 2022. MPC member Catherine Mann warned the pound could come under pressure in the near term if Threadneedle Street falls behind the Federal Reserve and the European Central Bank in lifting rates.

We saw Sterling fall against major currencies in the early part of yesterday’s trading session, and it is on course for its biggest six months drop against the US dollar since 2016. The British pound is down more than 10% against the dollar and has been one of this year’s worst performing major currencies. The main drivers for Sterling volatility has been the red hot inflation and economic slowdown.

EUR

We also saw the euro fall against the dollar as an early sign of decreasing inflation in Germany. Data suggests Germany has passed its inflation peak which could potentially reduce the ECB’s aggressive approach to raising interest rates.

European yields also took a hit yesterday morning on the back of Germany’s CPI readings and concerns about a less hawkish ECB.

Key announcements

07:00 – GBP – UK GDP reads at 0.8%