GBP lower after Bailey comments, USD higher after ISM

Good morning

A strong set of ISM PMIs from the US yesterday sent the US dollar higher with GBPUSD trading as low as 1.2480 and EURUSD to almost 1.0700. Both did recover a bit of lost ground although it was EUR that came off better, managing to regain 1.0730 while GBPUSD struggled to hold much above 1.2500, leaving GBPEUR testing support at 1.1660 from a high in the morning of 1.1725.

We have seen some USD strength again this morning, GBPUSD trading back below 1.2500 to reach 1.2465 so far. EURUSD has also come lower but not by as much, still holding above 1.0700 which means GBPEUR continues to weaken, now 1.1640. EUR finding some support on the notion that ECB could make on more rate rise at their meeting next week. Meanwhile BoEs Bailey said yesterday that we could see a marked fall in inflation this year and that rates are likely near the top of the cycle, those comments certainly responsible for this bout of GBP weakness.

The ISM reading still may not have been enough for the market to consider a rate rise at the next FOMC meeting but does affirm the general idea that rates will be high for longer. Several Fed officials have expressed confidence in the economy recently and Goldman Sachs lowered their chance for a US recession to 15%.

BoC kept rates unchanged as widely expected, a combination of this and the strong US PMIs pushed USDCAD up briefly to 1.3675 but it was unable to hold up there and has since slipped back as low as 1.3635.

Poland had been expected to either leave rates unchanged or perhaps cut 25bps yesterday but instead they surprised the market with a whopping 75bps cut to 6%. EURPLN jumped quickly from 4.5000 to 4.5600, and has continued that move this morning to trade within a whisker of 4.6000. NBP say they see inflation falling to the official target sooner than had been expected.

China trade balance slipped again, this time down to $68.36bn. Still a pretty decent surplus for the month mind you. Net exports were lower than this time last year, worth remembering that back then China was still in a bit of lockdown so their opening up doesn’t seem to have helped trade for the time being.

The Aussie trade surplus was also lower at A$8bn, the market seems to have paid little interest mind you and AUDUSD holds around 0.6380, GBPAUD following the general weaker GBP theme, trading down at 1.9535. To show how important China is to Aussie trade, China receive 29% of all Aussie exports. RBAs Lowe has been speaking, leaving the door open for rate rises should inflation become sticky. He did say that we are unlikely to see inflation in a narrow range, instead far more variable. This is something we’d not really considered and doesn’t bode well for currency stability. Perhaps we will end up having to look at a moving average inflatrion rates rather than a one-off month going forward?

In Lowe’s last speech as RBA Governor, he did say that RBA forecasting had been proved embarrassingly wrong. Back in March 2021 the RBA had suggested inflation would remain low and rates would likely remain around 0.1% until at least 2024. I don’t think they were the only central bank to think inflation and rates would stay low, we all remember the word ‘transitory’ that was used frequently by central banks to describe what they thought would be short-lived inflation.

Lowe also admitted that they had probably introduced too much stimulus through the pandemic but said a lot of key issued in the Aussie economy, such as house prices, are caused by society rather than monetary policy. Lowe seems to be taking the blame, his predecessors had their terms extended by three years, but Lowe hasn’t.

What I will remember about Lowe’s RBA is the number of times they surprised the markets with unexpected interest rate moves. This obviously make for exciting times and I think is some reflection on the current issues facing the global economy. But markets don’t like uncertainty and I wonder whether the new RBA head, Michele Bullock will try harder to signal forward guidance.

It’ll be another scorching hot day here today, temperatures likely to hit 30° (still loving that short cut) once again and fear not, for those tied to a desk in an office, the weekend is also looking pretty spectacular as well. In fact Saturday could well be the warmest we’ve had. Enjoy it while it lasts……

- 10.00 EU GDP

- 13.30 US initial jobless claims

- 15.00 CAD Ivey PMI

- 18.55 BoCs Macklem speaks

- 00.50 Japan GDP

- 07.00 German HICP