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GBP lower but more rate rises to come

Good morning

Everything was ticking along as normal yesterday, no major news to report from the currency markets, GBPUSD seeming happy in a tight range around the 1.2730 area, when suddenly and for no clear reason at the time, GBPUSD started moving lower. It went through 1.2700 and hit a low of almost 1.2600, before recovering a touch to the 1.2640 area, where we are now. We’d usually look at EURUSD to see if it followed suit, ie was this a US dollar push higher, which wouldn’t be a surprise given Powell seems to think we’ll see two more rates rises from US after their recent pause. But no, EURUSD hadn’t moved much and to prove that this was very much a GBP move, GBPEUR also fell from its highs around 1.1630 to hit 1.1550, that pair now 1.1580. EURUSD had been up to 1.0960 but drifted back to low-1.09s, now 1.0920. So yes, it has dropped but nowhere near as much as GBPUSD.

So why did it move? Well I was scrabbling around looking for answers, it was suggested that perhaps BoEs Bailey at the Sintra panel would say something that would give the market something to make them reconsider the idea that rates may peak near 6%. But no, he was as hawkish as ever, making it pretty clear rates will need to be high to fight inflation that he sees is driven by higher costs of labour rather than overwhelming demand. To those critical of BoE rate rises, he said he understood the pain they cause but runaway inflation would be more damaging overall.

As if to hammer home the point on higher UK rates, Goldmans have said they think BoE will raise rates another 50bps in August. They see the economy in better shape now than when rate rises began which gives BoE less of a challenge in balancing rate rises and supporting the economy. ECB on the other hand seemed a little less hawkish. Yes, there are still rate rises to come but the national inflation numbers have been coming in lower than expected and this could be reflected in lower EU inflation when numbers are released tomorrow. However, as in the UK, while headline inflation may drop, core inflation could push higher, leaving ECB with no choice but to stick to rate rises for the time being.

At the same panel, BoJs Ueda didn’t talk much of intervention, instead confirming Japan economy was doing well but that underlying inflation is still below the 2% target even though headline inflation is higher. No rate rises on the agenda here it seems, and with no talk of intervention USDJPY pushed up to 144.70, although as I type it has fallen sharply to 144.20 or so, at this stage I’m not sure if this is due to any official action or just showing the nervousness in the markets of possible intervention. GBPJPY currently 182.45. UBS seem to be thinking than Japans Kanda is the key to intervention and he has been more vocal recently, therefore raising the possibility of action by Japan. They look at downside USDJPY trades just in case.

GBPAUD has moved back below 1.9100 having been up to mid-1.92s briefly this week. GBP’s decline, along with stronger than expected Aussie retail sales overnight, has dragged the pair lower, now at 1.9090, just ahead of short term support at 1.9075. Difficult now for RBA who as we kow have surprised the markets recently with a couple of rate rises but lower inflation numbers earlier in the week seemed to suggest RBA could pause.

USDCNY fixed at another high in this cycle of 7.2208 although the markets thought I could well have fixed even higher given USDCNY had traded up to 7.2500. Some are now thinking this may be an indication that China are getting unhappy with CNY weakness and we could start seeing them intervening to give CNY some support.

I mentioned water companies recently and the fact that they are not running a good service. Huge money has been paid out to shareholders while debts mount and sewage is released on a regular basis, enough to put some rivers and beaches out of the reach of the public. Thames Water, whose CEO Bentley quit after two years in the role, is reportedly in financial difficulty with the government rapidly drawing up contingency plans in case of its collapse. Water companies have had it far too easy, paying out billions of pounds to shareholders without putting the necessary money into their systems to repair leaks and improve sewage treatment. Now I see we could be faced with a rise of some 40% in our water bills. If ever there was a case where I feel like my money is simply going to line someone else’s pockets, this is it. Absolutely criminal, all happening right under our noses. We haven’t heard the last of this.

Finally, over the next couple of days we have school proms for my two youngest. You’d think they’d be happy with being at a party with all their school mates, some of whom will be moving on into different fields after the summer. But no, the prom, a new suit or a new dress is not enough. Its all about where they can go for ‘pre’s’ and after-parties. My daughter asked if she could bring some friends back after the Prom. I asked how many, thinking it would be a small and select group of her closest friends. Her reply came back ‘About 80’. Imagine eighty 18 year olds turning up at midnight. Not my idea of fun, but she was surprised when I said that it is completely out of the question. Really, sounding like an old man, but the after party in my day was usually a long walk home.

- 09.00 ECB economic bulletin

- 10.00 EU consumer confidence

- 13.00 German HICP, CPI

- 13.30 US GDP, core PCE, initial jobless claims

- 15.00 US pending home sales

- 17.30 BoEs Tenreyro speaks

- 20.00 Feds Bostic speaks

- 00.30 Japan Tokyo CPI, unemployment rate

- 02.00 China manufacturing, non-manufacturing PMI

- 07.00 UK GDP

- 07.00 German retail sales

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