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USD: Macro themes continue to drive financial markets.
One does not have to look too far beyond the inverted US yield curve or the collapse in copper to understand that investors continue to re-price global growth prospects lower. Bank of England Governor Andrew Bailey yesterday said that the global growth outlook has 'deteriorated markedly'. The big question for financial markets is whether this deterioration in growth prospects is enough to curtail tightening cycles - especially that of the Fed. It was instructive in yesterday's risk asset sell-off that only 6bp was priced out of this year's Fed tightening cycle compared to 12bp taken out of both the ECB and BoE cycles. Driving that is probably: a) European activity is more exposed to the Russian energy supply shock and b) the US economy entered this global tightening cycle with more momentum and a positive output gap.
EUR: Parity beckons
When it came, the break of EUR/USD to a new cycle low was unexpected. If anything, driving yesterday's market activity was the continued rise in European natural gas prices as Russian supplies ebb. Already running at only 40% of capacity, Russia's Nordsteam 1 pipeline will be closed for maintenance 11-21 July (when will it reopen?) and exposes the friction of continuing European dependency on Russian gas at a time when it ideally would be shunning it completely. One year ahead Dutch natural gas prices have risen around 30% over the last week and back to the December spike highs. And the German government is now being dragged into state bailouts of major gas utility giants such as Uniper.
GBP: Big hitters quit the cabinet
Sterling has tended to ignore the indiscretions of Boris Johnson's government - largely because the Conservatives have a large majority. But the resignations of the big-hitters in charge of the Treasury and Health will leave the PM rocking and effectively sees sterling hit as hard as the euro. It is not clear whether the new chancellor, Nadim Zahawi, will represent a shift in economic policy, although he may be tempted to loosen up fiscal policy earlier than expected.
EUR/GBP can continue to trade near 0.8600, but a 2% dollar advance puts cable down near the 1.17 area. Additionally, we have been saying over recent months that sterling has been exhibiting more of the characteristics of a growth currency. A tough summer for equities suggests cable remains vulnerable to the 1.14/15 area.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.