Good morning
After the initial bout of USD strength yesterday morning, the remainder of the day saw renewed USD weakness. Weak PMI numbers from EU, UK and US showed the downside risks to the economy. However the stand out for me was GBP strength. It seems like the market has finally got to grips with the idea that UK rates are likely to be above both US and ECB rates for some time to come. GBPUSD has powered up to a high so far of 1.3365.
GBPEUR has finally managed to push through the 1.1930 area and then beyond 1.2000, to reach a high so far of 1.2020. We’ve not seen levels like this since April 2022. EURUSD is still at fairly elevated levels but, at 1.1120, is still some way off for the recent highs. There is a growing feeling that ECB could cut rates again in October. With inflation seemingly under control, ECB growth forecasts cut and a worrying outlook for employment in the EU, a cutr could well be warranted.
We’ve heard from several Fed officials who voted in favour of the 50bps cut last week. Bostic and Kashkari suggested that inflation is under control and the move was warranted to support employment, which is where the greater risk now lies. Goolsbee added that many more cuts will be needed over the next year if the Fed really wants to battle weakness in the labour markets. Whether we get another 50bps cut, or moves are reduced to 25bps is not yet clear.
USDJPY bucked the weaker USD trend, reaching a high of 144.65 this morning. Those yen crosses have been dragged higher as a result, GBPJPY is now up at 192.70, at one stage this morning it was as high as 193.25.
RBA left rates unchanged as expected overnight, the meeting came and went with little in the way of fuss. RBA, one of the few remaining hawkish central banks, are intent on keeping inflation under control and rates will remain restrictive until they can be sure it an remain persistently at or under target. They do acknowledge weaker growth and lower wage price pressure, but their priority is clearly inflation for the time being.
China announced forthcoming rate cuts overnight in something of a surprise move, the RRR will be lowered by 50bps and the seven day repo rate by 20bps to 1.5%, with other measures also announced. The move is designed to boost economic growth, there is a suggestion of more rate cuts to come to help them achieve this. Usually surprise rate announcements have quite a major impact, but market reaction here seems to be muted, although Chinese equity markets have seen a decent push higher, with Shanghai Comp and Hong Kong’s Hang Seng up over 4%.
Israel’s attacks on Hezbollah in Lebanon continue. The US are sending more troops to the region as tensions look set to boil over, while they also look to prevent further escalation. Still, it has been almost one year already since the Hamas attacks on Israel and since then we have seen little other than escalation of attacks from both sides. It is difficult to see how peace can be found at the moment.
German IFO numbers this morning are not expected to look good and I wouldn’t be surprised if they missed expectations, which could put EUR under more pressure. However with GBPEUR around 1.2000 I’m seeing EUR buyers starting to take a keener look at forward pricing, the recent push higher in spot going some way to offsetting the negative forward points.
A bit drier so far today, we had some heavy rain yesterday but not as bad as some areas that saw flash floods, and I even saw clips online of what looked suspiciously like a tornado in the Luton area. Crikey!
- 09.00 German IFO
- 14.00 US House prices
- 14.00 Feds Bowman speaks
- 15.00 US consumer confidence
- 17.00 ECBs Nagel speaks
- 18.10 BoCs Macklem speaks
- 02.30 AUS CPI
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