Your weekly economic update from the team at FXD Capital
US and European stocks recorded new all-time highs this week and demand for the Pound remains strong with the Bank of England now expected to be the first major central banks to raise rates next year. Strong data in the US also increases the likelihood of the Fed tapering their QE program before year end.
On a foreign exchange front GBP/USD has strong buying interest with the 1.4000 level as the initial upside target – a closing break through here opens up the yearly highs of 1.4250. GBP/EUR continues to trade just below the yearly highs of 1.1800.
Sterling was further buoyed by yesterday’s Bank of England report. While monetary policy was kept on hold as widely expected, looking forward markets continue to monitor the MPC closely with markets pricing in an initial rate increase for mid-2022. This is driven by rising inflation which is forecast to peak at 4%. Some believe a more meaningful shift in the BOE’s policy’s will be delayed until the end of the furlough scheme, allowing for a more accurate and clear view on the labour market.
With inflation in mind, petrol prices reached the highest levels seen in eight years, with the price of petrol now sitting at around 135p per litre, making July the most expensive time to fill up since 2013.
Strong data this week increased the likelihood of the Fed tapering their QE program before year end. With $120bn a month in bond buying since the start of the pandemic, all eyes will be on the payrolls data this afternoon…
The US trade deficit has widened to a record level in June, with a $75.7Bn seasonally adjusted figure recorded. Pre pandemic, the commerce department stated the deficit had been bouncing around the $40-$50bn mark for a number of years. US infrastructure bill expected to be voted on this weekend which will likely provide a further economic boost worth up to £1trn.
The pandemic is still the main factor for the eurozone. The Bloc has relied heavily upon its fiscal and economic policy to counteract the negative impact. We can see this week that second quarter GDP continued to increase, standing at a 2% rise in the first half of 2021, thanks in part to Italy and Spain for the most significant contributions. The sizeable gains posted by these two countries is likely due to the recent reopening of tourism, which we can expect to continue into the summer holidays season ahead. On the face of it, it sounds great, but factor in that we are still 3% down compared with pre pandemic 2019 levels and there is still a way to go.
All the best for the week ahead
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