Recessionary Fears Grow

GBP: British retail sales fell much more than expected in August; another sign that the economy is sliding into recession as the cost-of-living crunch squeezes households' disposable spending. In fact, retail sales volumes dropped by 1.6% in monthly terms in August, and 5.4% from a year earlier – the biggest fall since December 2021. The figures were well below analyst’s expectations for a drop of 0.5% on the month and 4.2% on the year, adding worries about the strength of demand in Britain’s economy. Although inflation dipped below 10% last month, households are still grappling with the biggest price increases since the early 1980s. Ultimately, the sombre atmosphere in the UK and news of slow economic growth have heavily weighed on the British pound pushing it to new lows against its major rivals and urging decisive action from the Bank of England next week.

EUR: European stocks received a negative handover from Wall Street, with the main U.S. indices closing sharply lower on renewed fears that aggressive monetary tightening will result in a global recession. Today’s attention will turn to the release of Eurozone CPI data for August, which is expected to climb 0.5% on the month, up 9.1% on the year. Nonetheless, the European Central Bank hiked its key interest rates by a historic 75-basis points last week and signalled more hikes ahead as the policymakers attempted to get on top of these soaring prices and inflation’s juggernaut ascension.

USD: The dollar hovered near its recent peaks this morning as expectations that the Federal Reserve would need to hike more to tame inflation sent Treasury yields higher and kept the greenback in demand. In fact, the two-year U.S. Treasury yield, a bellwether for interest rate expectations, scaled to a fresh peak of 3.90%, the highest since 2007. Furthermore, Fed funds futures point to a 75% chance of a 75-basis point rate hike at next week's meeting and a 25% chance of a 100-basis point increase. Ultimately, in the wake of this week’s red hot inflation report, investors are now bracing for another substantial interest rate hike by the Fed, which is likely to further depress economic activity in the world’s largest economy and main growth driver. Moreover, market participants expect dollar strength to persist, at least in the near term, with two key factors fuelling its appreciation: hawkish market pricing for the FOMC and worsening global growth outlook.