The attempted resignation of Italian PM complicates things for the ECB

GBP

The resignation of UK Prime Minister Boris Johnson has added complications to the fight against inflation the Bank of England has on its hands. Without the prospect of any alterations to fiscal policy, it’s entirely on the BoE’s shoulders to manage the economy over the next two months before the next UK leader ascends. Ultimately, this means that the BoE may pay more attention to growth, seemingly setting it back in its commitment to control inflation. This is possibly the main driver as to why we are seeing Sterling underperform, especially against the US dollar.

USD

The Federal Reserve is continuing to take an aggressive stance on tackling inflation with markets predicting a minimum of 75 basis points rate increase at the central bank’s next decision meeting, and this will continue to provide stability for the dollar. What the Fed does matters for the BoE and Sterling stability – rapid rate hikes from the Fed would mean the BoE has to try and keep up with its counterpart in order to defend the value of the British currency. The pound has already fallen 12.5% this year. Money markets suggest Bank Rate will peak just above 3% around year-end, meaning the BoE will unlikely ever close the gap with the Fed.

Today’s data release includes Retail Sales for the US, with expected headline sales bouncing back at a month-on-month pace of 0.8% following the 0.3% dip seen in May.

EUR

Regarding the European currency, politics may be of concern over the coming days after the attempted resignation of Italy’s Prime Minister Mario Draghi on Thursday. EUR/USD saw a brief move back below parity when the Italian PM offered his resignation, which President Sergio Mattarella refused to accept. The Italian political climate comes at a time of rising debt costs. The situation could complicate the European Central Bank’s plans to raise interest rates in the coming months. Any decline in ECB rate hike expectations would drag on euro exchange rates, potentially offering the GBP/EUR a route higher.