Week of 27 JULY

Economic data was eclipsed by geopolitics and earnings last week, with the highlight being the ECB delivering on expectations and UK inflation coming in lower than expected. Brent started the week at $90 per barrel as the conflict between the US and Iran heated up, rising to a peak above $100 by Thursday after attacks on shipping in the Red Sea but falling out of triple digits towards the end of the week.

The week ahead is busy on the economic front, with rate decisions from the Fed, BOE and BOJ alongside GDP figures from the US and the Eurozone.

The Week in Review

Geopolitics took centre stage this week as the conflict in the Middle East escalated, with no sign of the Strait of Hormuz reopening. The narrative shifted back to concerns about energy supplies and rising inflationary pressures, which would leave central banks more hawkish. The odds of the Fed hiking by the end of the year rose to over 90%, with the market pencilling in a rate hike as soon as September. Global yields were higher, but notably the benchmark US Treasury surged to an 18-month high. Gold prices were volatile, starting the week at a little over $4,000 per ounce, rising to over $4,150 by mid-week amid safe-haven flows, but falling back to the $4,050 range towards the end of the week as the odds of Fed tightening increased. Tech shares came under pressure this week, with semiconductors weighing on indices amid concerns about capital expenditure. Google parent Alphabet posted its first negative quarterly cash flow in more than a decade as it ramped up AI spending, spooking investors who pushed the share price down. The rotation out of megacaps continued, with weakness in hyperscalers offset by a post-earnings pop in Intel's shares.

The ECB delivered the expected hawkish hold, with President Christine Lagarde clearly laying the groundwork for a rate hike at the September meeting. She suggested that policymakers were already considering raising rates at this meeting. The markets anticipate as many as two more rate hikes by the end of the year. The EURUSD broke below 1.1400 following the decision and fell to lows not seen since June.

Headline inflation in the UK fell to 2.6%, the lowest level since early 2025, while the core rate stayed unchanged, as was widely expected. Meanwhile, UK jobs numbers were largely in line with expectations, and retail sales were higher than expected, suggesting the UK domestic economy remains resilient. The market continued to expect the BOE to hold rates unchanged through the rest of the year. Staying in Britain, Andy Burnham was sworn in as the new Prime Minister on Monday and surprised markets by appointing former Defence Secretary John Healey Chancellor. UK equities rose, but the pound weakened to 1.3300 as investors wondered where the government would find the funds for new spending initiatives.

Overall, US indices underperformed and are set to end the week lower, while European indices posted gains amid a rotation towards defensive stocks. Higher yields pushed the dollar higher, while markets were concerned by Brent briefly returning to triple digits.

Biggest Market Movers

• The dollar trended higher through the week, with higher yields and relative softness in the euro following the ECB decision.
• The Swiss franc was among the worst performers of the major currencies, weighed down by gold prices.
• The pound underperformed after softer CPI data, coupled with higher long-term yields.
• Silver prices recovered and were the top-performing precious metal amid expected resurgent industrial demand.
• The yen continued near 40-year lows, pressured by a stronger dollar and rising energy costs.
• Brent briefly rose to $102, a 2-month high, and accumulated gains of 40% since the start of the month.

Top Events in the Week Ahead

The coming week has an even more intense economic calendar, but it could be overshadowed by the conflict in the Middle East. The focus will likely be on whether tensions around the Red Sea ease or escalate, with the potential to boost crude prices and affect the monetary policy outlook. Barring that eventuality, the focus will be on central banks, with the Fed, BOE and BOJ all expected to hold at their respective rate decisions. However, markets could react to commentary on the outlook, particularly from the Fed, as investors are increasingly pricing in a September hike. The world's largest economies, the US and the Eurozone, will also report Q2 GDP figures. Corporate earnings could be a catalyst, with earnings season nearing its peak as investors weigh whether to intensify rotation out of large tech or resume bets on AI.

Fed To Hold As Hiking Odds Rise

The pressure is back on the Fed to hike amid rising energy costs, with Chair Kevin Warsh insisting he's intent on fighting inflation. The odds of a rate hike have been creeping higher this week, with about two-thirds saying hold against a third for 25bps of tightening. However, the market sees the odds of a September hike at almost 80%. Warsh's post-rate-decision comments are expected to be treated as confirmation, which could further shore up the dollar. He's likely to be reluctant to provide forward guidance, which could generate market volatility. The market will then have its first look at US Q2 GDP on Thursday, with the consensus for the US economy to have slowed to 1.6% annualised growth. At the same time, the Fed's preferred inflation measure, the Core PCE price index, is expected to ease to 3.7% from 4.1% prior. Gold might finally leave behind the $4K handle if the two events disappoint.

BOE To Hold Rates Again

Economists are near unanimous, and the market is pricing in another BOE hold, with the focus likely on the vote split. Last time, it was 7-2, with the dissenters voting in favour of a hike. Since then, inflation has been cooler than expected, the government has announced new pricing measures, and a survey has shown UK businesses are planning smaller price and wage hikes later this year. This could lead to a more unanimous vote to hold, which would likely be seen as dovish. But the recent rise in energy prices might increase the number of dissenting votes against a hike, which could be seen as hawkish.

BOJ Will Try Hawkish Hold

The BOJ is expected to keep rates unchanged after June inflation was softer than expected but will likely try to signal a hawkish stance to support the yen. The bank has repeatedly warned about inflation "overshooting", which lost some credibility amid easing crude prices but could have more punch now amid rising energy prices. If the BOJ fails to convince markets of its hawkishness, the yen could weaken in the aftermath, paving the way for 165.00.

Eurozone Stagflation Warnings

The two major data points for the euro this week might test the ECB's narrative. Flash Q2 GDP figures come out on Thursday and are expected to show the shared economy rebounded to +0.1% from -0.2% in the first quarter, avoiding a technical recession. That would satisfy the ECB's argument that the earlier negative reading was regional and transitory. On Friday, Eurozone Flash July CPI data are released, with the headline rate anticipated to rise to 2.9% from 2.8% and the core rate to remain unchanged at 2.4%, keeping pressure on the ECB to address rising consumer prices. Below 1.1400, the fibre could see a move lower to 1.1300.

Other Events and Earnings

Monday has the German Ifo Business Climate and US durable goods orders. The US June trade balance comes out on Tuesday. For Wednesday, UK mortgage approvals are expected. Thursday includes the Eurozone unemployment rate. Friday sees China's official PMI figures.

Earnings season will be moving through its peak this month, with a plethora of names reporting, including AstraZeneca, Vodafone, Visa, Coca-Cola, Seagate, Boeing, GSK, Barclays, Microsoft, Meta, Procter & Gamble, ARM Holdings, Qualcomm, Apple, Amazon, Mastercard, Shell and AbbVie.