Financial Markets’ Weekly Recap, August 14-18

Eurozone

Eurozone inflation has slowed further, and underlying price pressures appear to have peaked, according to Eurostat statistics released on Friday, lessening pressure on the European Central Bank to continue raising rates following its quickest rate-hike cycle on record.

To confront a historic increase in inflation, the ECB has raised rates from deep negative territory to two-decade highs in just a year, and policymakers are now debating whether they have done enough to return price growth to 2%.

Consumer prices rose by 5.3% in July, compared to 5.5% in June, extending a downward trend that began last autumn. Meanwhile, Eurostat reported that price increase excluding food and energy, the underlying metric carefully tracked by the ECB, was flat at 5.5%, confirming preliminary findings.

However, services inflation increased to 5.6% from 5.4%, raising concerns because service costs are highly influenced by wages and tend to be sticky.

The relatively mild data are unlikely to resolve the ECB’s rate dilemma, and markets continue to expect another rate hike, to 4%, this year, even if not necessarily in September.

Incoming data is pulling policymakers in opposite directions.

Underlying price pressures are high, and the labour market is extremely tight, implying that wage pressures will persist because employees have excellent bargaining strength.

UK

According to the latest data released by the Office for National Statistics (ONS) on Friday, retail sales in the United Kingdom fell 1.2% month on month in July, compared to -0.5% projected and 0.6% previous. Core Retail Sales, excluding vehicle motor fuel sales, decreased 1.4% MoM, compared to -0.7% projected and 0.7% forecast in June.

Annual Retail Sales in the United Kingdom fell 3.2% in July, compared to -2.1% predicted and a 1.6% drop in June, while Core Retail Sales fell 3.4% in the reported month, compared to -2.2% projected and -1.6% previously.

GBP

The pound fell on Friday as investors fled to the safe haven of the US dollar amid negative market mood, while British retailers reported a larger-than-expected drop in July sales.

According to official figures, British sales volumes were 1.2% lower in July than in June, as severe rain discouraged buyers who were already suffering the effects of high inflation and 14 consecutive interest rate increases.

Reuters polled economists, who predicted a 0.5% dip.

The pound was recently 0.16% worse against the dollar at $1.2727, halting a three-day winning streak, while it was also weaker against the euro, which advanced 0.18% to 85.46 pence.

On Thursday, the pound touched its highest level in a month, reaching 85.24 per euro.

Recent British data, notably GDP and wage figures, have been stronger than predicted, fueling market expectations for future interest rate hikes by the Bank of England.

Markets are practically pricing in a 6% top for the UK benchmark rate, which is now at 5.25%, owing to these indicators of economic strength at a time when inflation remains sticky.

Expectations that the Bank of England will continue to tighten policy for longer than the Federal Reserve of the United States and the European Central Bank, both of which may have completed their rate hike cycles, have boosted the pound this year.

This narrative appears unlikely to be dramatically disrupted by Friday’s soft retail sales report.

The pound was still expected to gain 0.32% against the dollar this week.

At the closing on Friday, UK equities were weaker as losses in the Fixed Line Telecommunications, Automobiles & Parts, and Industrial Transportation sectors pushed shares lower.

The Investing.com United Kingdom 100 fell 0.63% during the closing in London, setting a new one-month low.

British American Tobacco PLC was the session’s highest gainer on the Investing.com United Kingdom 100, rising 1.53% or 38.00 points to close at 2,525.00. Tesco PLC rose 1.30% or 3.20 points to 249.70 in late afternoon, while WPP PLC rose 0.92% or 6.80 points to 744.60.

Bitcoin

Bitcoin, the largest cryptocurrency, fell to a two-month low on Friday and broke out of its recent narrow range as a wave of risk-off dominated sentiment in global markets.

Bitcoin fell 7.2% on Thursday, its biggest one-day decline since November 2022, when the FTX cryptocurrency exchange collapsed.

It then fell to a two-month low of $26,172 during Asian trading hours on Friday, the lowest since June 16. It partially rebounded to $26,478 by 0713 GMT.

Global markets were sold off, with major Wall Street indices closing lower on Thursday and Asian stocks heading for a third week of losses on worries about the Chinese economy and worries that US interest rates will remain high for longer due to the health of the economy.

Ether, the second largest cryptocurrency, settled at $1,690.20 after falling sharply on Thursday as well.

Gold

Lower monthly milestones in gold’s price are challenging the belief that it has found a secure home above $1,900. And a fourth weekly defeat.

The most active January contract for gold futures on New York’s Comex settled at $1,916.50 per ounce, up $1.30, or 0.01%, on the day. However, it lost slightly more than $30, or 1.5%, for the week.

Spot gold, which follows real-time actual bullion transactions and is more closely tracked by certain gold traders than futures, fell below $1,890 for a second day in late afternoon trade in New York. Spot gold was at $1,888.38 at 15:45 ET (19:45 GMT), down 99 cents, or 0.01%, on the day.

With the market price of gold currently in the $1,800 range, analysts are unsure how much longer those long gold futures can cling to the $1,900 mark. The dollar’s gain has been too much for gold since the beginning of this week.

USD

The dollar was projected to gain 0.5% this week as robust U.S. economic data and hawkish hints from the Fed’s July meeting minutes increased betting that interest rates will remain higher for longer.

While the Fed has indicated that there would be only one more hike this year, the possibility of higher-for-longer U.S. rates is bad news for gold markets since it raises the opportunity cost of keeping non-yielding assets. This transaction has hammered gold until 2022, limiting any significant advances in the yellow metal this year.

The expectation of fresh monetary policy and economic clues from the Jackson Hole Symposium next week also maintained positioning heavily tilted towards the dollar, and investors apprehensive of metal markets.

Gold was also weighed down by a surge in US Treasury yields, with the 10-year yield reaching levels last seen during the 2008 financial crisis.