Oil Above $100 Again as Two Central Banks Prepare to Decide.
Summary
Brent crude settled above $100 for the first time since May as the conflict between the US and Iran escalated sharply, threatening the disinflation that had taken hold through June
UK inflation eased more than expected, while retail sales and business activity both surprised strongly to the upside, yet sterling still ended the week lower
The European Central Bank left all three of its key rates unchanged in a unanimous decision, though President Lagarde acknowledged that some governors had questioned whether a further increase was warranted
The Federal Reserve announces on Wednesday and the Bank of England on Thursday, the latter alongside a new Monetary Policy Report
The renewed escalation in the Gulf has undone much of the energy relief that pulled inflation lower through June. Brent settled above $100 on Thursday for the first time in two months, having begun July near $71, before retreating on Friday amid reports that Pakistan was working to restart talks between Washington and Tehran. Attacks in the Red Sea have opened a second chokepoint alongside the Strait of Hormuz, and US strikes on Iran have continued for close to a fortnight. Both the Federal Reserve and the Bank of England now meet facing an inflation picture materially different from the one they were looking at only two weeks ago.
Sterling weakened despite an unusually strong run of domestic data. Inflation eased more than forecast in June as fuel costs fell back, retail sales rose sharply against expectations of a decline, and business activity returned to growth in July for the first time in three months, with manufacturing outpacing services for once. Pantheon Macroeconomics pointed to warm weather, England's World Cup campaign and the easing of political uncertainty as drivers of the consumer rebound. The labour market remained the soft spot, with payrolled employment lower on the year and vacancies falling again. That the pound still lost ground reflects the pull of renewed fiscal concern and a broadly risk averse tone. Thursday's decision is widely expected to be a hold, though two members voted for an increase in June and are anticipated to do so again, and the accompanying Monetary Policy Report makes this a genuine set piece.
The dollar heads into a Federal Reserve decision on Wednesday at which no change is expected. The interest lies in how Kevin Warsh frames the return of the energy shock, having told Congress only a fortnight ago that he did not regard the fight against inflation as won. Thursday brings the advance estimate of second quarter growth and the PCE price index, the Fed's preferred inflation gauge. The Atlanta Fed's tracker points to the economy decelerating from the first quarter, and while the June inflation reading is likely to look encouraging, it predates the oil surge entirely. Warsh is left to weigh a set of figures that events have already overtaken.
The euro drew support from a firmer than expected showing in eurozone business activity, which strengthened in July to its best reading in five months. The European Central Bank held rates on Thursday, a unanimous decision following June's increase, its first since 2023. Lagarde declined to commit to any path but confirmed that a further rise had been discussed, and attention has shifted to the September meeting. Thursday brings the first estimate of second quarter growth for the bloc, with flash inflation following on Friday. The energy rebound complicates matters, since the Governing Council's June projections had assumed a higher oil price than the second quarter actually delivered, making that period look better than the current backdrop warrants.
Events to Watch This Week:
Wednesday 29 July: US Federal Reserve rate decision and press conference
Thursday 30 July: Bank of England rate decision and Monetary Policy Report; US Q2 advance GDP; US PCE price index (June); eurozone Q2 flash GDP
Friday 31 July: Eurozone flash CPI (July)
Two central bank decisions on consecutive days, arriving alongside first readings on second quarter growth either side of the Atlantic and the Fed's preferred measure of inflation, make this one of the heaviest weeks of the summer for currency markets. Speak to the Orbis dealing team ahead of Wednesday to ensure your upcoming transfers are protected.
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