Summary:

• Safe-haven US dollar rallies against most of its peers, as weak Chinese macroeconomic data heightened concerns over global growth
• European currencies underperform, as natural gas prices march to fresh highs
• EUR/USD dips back below 1.02 level, erasing all of its gains following last week’s softer-than-expected US inflation report
• UK labour data this morning could move the pound, as investors await Wednesday’s all-important inflation report for July

A fresh batch of disappointing macroeconomic data releases out of China sapped investor appetite for risk during Asian trading on Monday, as did the news that a handful of additional cities in the country are being placed under further covid lockdown measures. Chinese activity data for July covering retail sales, industrial production and fixed-asset investment all fell short of economists estimates yesterday, with the government’s draconian pandemic restrictions continuing to have an outsized impact on the country’s economy. Despite ongoing criticism, Beijing has continued to stick by its highly controversial ‘zero-covid’ approach, which investors see as an added complication to global growth in the second half of the year.

Currencies reacted as they usually do during times of rising stress or market uncertainty, with the high-risk major and emerging market currencies selling off against the safe-havens, notably the US dollar and Japanese yen. Among the worst performers were the antipodean ones, which have close trade relations with China, and those in Europe, particularly in the CEE. The currencies in the latter were hit by the double whammy of weak Chinese economic data and another move higher in European natural gas prices, which have more than doubled since mid-June. The euro managed to hold up slightly better than its European counterparts, although the EUR/USD pair still dropped back below the 1.02 mark on Monday, and has now erased all of its gains following last Wednesday’s US inflation report.

While the dollar was firmly on the back foot following last week’s weaker-than-expected US inflation print, a handful of hawkish FOMC member speeches have helped spark a reversal in these losses in the past few trading sessions. The likes of Kashkari and Daly suggested late-last week that the data wouldn’t necessarily persuade them from voting in favour of third consecutive 75 basis point rate hike at the Fed’s September meeting. We favour a 50bp move, although markets appear fairly torn, with futures still pricing in between a 40-45% chance of a larger hike during the London session yesterday. This Wednesday’s US retail sales print may help guide these expectations, as could the July meeting minutes set for release on the same day.

In the meantime, a handful of major economic data releases could move markets in the next few days. We will be paying particular close attention to the latest UK labour report (Tuesday), and inflation numbers (Wednesday). We see a decent chance that the headline inflation number may have tipped into double-digits last month (9.8% expected). In our view, this would all but guarantee another 50 basis point interest rate hike from the Bank of England at its next meeting in mid-September.

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