UK political turmoil remains volatile after Johnson's resignation

The Fed's rate hike of 75 basis points this week has been priced in by the market, and the probability of a 100 basis point rate hike has dropped to 15%. In this way, even if the Bank of England continues to raise interest rates slowly at the original pace this week, it will not be left behind by the Fed. Therefore, whether the pound, which has been in a volatile upward trend recently, can take the opportunity to produce a breakthrough market depends on the market reaction after the interest rate decision meeting of the two central banks in the United States and the United Kingdom.

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The Bank of England may refrain from a larger rate hike in August, sticking to a modest 25 basis point rate hike, but it is a very difficult decision. Global pressures related to supply chain disruptions and soaring energy prices have pushed UK inflation to a 40-year high and the Bank of England is struggling to cope. High inflation has become a cost-of-living crisis and now raises the odds of a recession. The Bank of England is the world's major central bank to act first in the current rate hike cycle, and has raised rates five times since December, raising rates from a pandemic low of 0.10% to the current 1.25%.

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After Jensen's resignation, the British political situation is still in turmoil. The two candidates for the leadership of the British Conservative Party, former Chancellor of the Exchequer Sunak and current Foreign Secretary Truss, have launched the first round of televised debates. Truss has promised to create low-tax investment zones in the UK to attract Conservatives. The key period for the power alternation between the Conservative Party and the Labour Party will depend on the next two years, which will mainly depend on the performance of the next British Prime Minister. If the new prime minister can boost the British economy in the next two years, without major chaos, and win some reputation and leadership for the UK internationally, the Conservative Party may remain in power.

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The UK’s CBI retail sales expectations index recorded -14 in July, the lowest level since March 2021. Confederation of British Industry: Retail sales continued to decline slightly in the year to July, the fourth consecutive month of no growth in retail sales. Retailers expect sales to decline at an even faster pace through August of this year.

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Fed watcher and former Fed governor Larry Meyers: Powell may avoid making a specific commitment on the next rate hike on Wednesday, but may try to make the outside world think it will be 50 or 75 basis points, and will prevent the market from anticipating a direction of 100 basis points develop. Powell is expected to mention what "threshold" levels of inflation could trigger a slowdown in the pace of tightening, paving the way for the end of the rate hike cycle.

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U.S. consumer confidence fell to its lowest level since February 2021 in July, as sentiment on the economy grew more pessimistic amid persistent inflation. Continued weakness in consumer confidence could lead consumers to cut back on discretionary spending as the economy struggles. Inflation dented market confidence and forced the Federal Reserve to raise interest rates aggressively to dampen demand.

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As long as the stalemate over Ukraine continues, the Kremlin is likely to keep gas supplies vital to Europe at a minimum, increasing pressure on the EU to take a tough stance on Russia and Ukraine. Continental Europe, Russia's largest export market, could be starved of fuel if supply cuts continue into winter. Russia claims technical problems such as missing gears and turbine maintenance have forced it to cut supplies. But in effect, the Kremlin is using it to get EU leaders to reconsider the sanctions they have imposed, as well as their support for Kyiv. Kremlin and Gazprom are expected to continue to find reasons to restrict gas flows, preventing increased supply for European customers to meet their winter needs.

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EU countries have approved a scaled-down emergency plan to curb gas demand in Europe after compromising with some EU member states suffering further gas cuts from Russia . The energy consumption reduction proposal requires all EU countries to reduce their natural gas use by 15% from August this year to March next year on a voluntary basis. The original proposal would have allowed binding clauses to be triggered in the event of an energy supply emergency, but countries agreed to exempt many countries and industries after some resisted the proposal to force all members to cut gas consumption by 15%. . Hungary is the only country opposed to the deal, two EU officials said.