US Inflation Heads to Double Digits, Rate Hikes Ahead?
In this article, read the outlook for:
- the main global economic drivers mid-to-end July,
- interest rate hikes by the European Central Bank (ECB) and Federal Reserve,
- the outlook for the EURUSD,
- and earnings season highlights.
The global economy is in a state of excess demand and limited supply for crude oil. The main drivers are the conflict in Europe’s second-largest country Ukraine, combined with a surge in economic activity and travel now that COVID-19 restrictions have been shelved in many countries. Fuel costs feature directly or indirectly in most economic activities, so inflation in the energy markets has taken root in other sectors like retail, construction and travel.
The US may be heading towards double-digit inflation rates after the June CPI reading came in at 9.1 percent. This means an increased likelihood that the Federal Reserve will not ‘pause’ interest rate hikes in September and the central bank may hike its key interest rate guidance by 0.75 percent during the meeting set for July 26 and 27.
In related developments, the ECB updates its monetary policy on July 21. Europe’s central bank is expected to move away from its dovish stance and lift the banking sector’s key interest rate guidance by 0.25 percent from the current level of 0 percent.
The divergence between the ECB and Federal Reserve’s monetary policies resulted in the EUR losing value versus the USD, to the point that the EURUSD currency pair hovers around parity levels amid a sell-off at the time of writing.
Source: Admirals MetaTrader EURUSD Daily Chart. Date range: 7 April, 2022 – 15 July, 2022. Captured 15 July, 2022. Past performance is not a reliable indicator of future results or future performance.
Once the ECB starts lifting interest rates, the EUR may see more support. Without higher interest rates in Europe, the Eurozone’s single currency could fall to historically low levels, with possible impacts on consumer spending power, the balance of trade and export prices, and bond yields.
Factoring in high inflation rates complicates the current economic scenario even more. With a lower currency value and higher daily expenses, it will be difficult for salaries to keep up with the cost of living, particularly when Europeans travel outside the Eurozone or buy foreign goods.
The second quarter of 2022 was an unusually complex one, even for COVID-19 times. The full extent of its impact on company earnings is being revealed over the next two weeks of earnings reports.
Already, JP Morgan Chase reported lower-than-expected EPS results of 2.76 USD for Q2 versus the expected 2.90 USD. The banking giant’s interest rate income was 19 percent higher versus the same period last year, but bearish sentiment towards expansion investments like IPOs weighed on revenues.
Bank of America – Monday, July 18.
Johnson & Johnson – Tuesday, July 19.
Tesla – Wednesday, July 20.
Roche Holding AG – Thursday, July 21.
American Express – Friday, July 22.
Microsoft, Visa and Coca-Cola – Tuesday, July 26.
Apple – Thursday, July 28.
That wraps up our market outlook. For a full suite of breaking news and analysis, sign up for Admirals Premium Analytics.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.