Rate differentials drives GBP higher against USD and EUR

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

USD starts the week on the front foot

Good morning

USD has remained under pressure into the close last Friday after the Fed’s 50bps rate cut, GBPUSD trading around 1.3320, EURUSD at 1.1160.  This morning we have seen both pairs sold off rather sharply to 1.1120 and 1.3275, the USD pushing higher on what I can only think is safe-haven buying as Israel conducts extensive airstrikes on Hezbollah targets in Lebanon, amid concerns that a ground offensive may be following soon.  The attacks come after Hezbollah launched a missile strike on Israeli targets over the weekend.  Gold prices remain with US$10 or so of the all-time high that we saw earlier this morning, now $2,620.

A set of weak German PMIs this morning did nothing to help the single currency, EURUSD slipping back a few more points to 1.1110 which helped GBPEUR push up to an impressive 1.1945.  Meanwhile in Germany, it looks as though the ruling SPD has managed to hold off the right-wing AfD in the Brandenburg regional elections.  It was close, just one or two percentage points in it. 

USDJPY is off its overnight highs which came in around 144.45, which also happened to be the highs seen on Friday afternoon.  Watch that level.  For now though USDJPY is at 143.65, perhaps Yen has also seen some safe haven buying this morning.  But we are still well off the recent lows and there is some talk that now the Fed rate cut is out of the way, we could see a return of the yen carry trade, ie upside USDJPY, EURJPY, GBPJPY etc.  GBPJPY, which had been below 184.00 last week, hit 192.25 overnight, before that Yen buying dragged it back down to 190.50. 

PMI numbers out from UK, EU and US today, plus several central bank officials will be speaking.  In the early hours of tomorrow morning we’ll hear the latest rate decision from RBA.  Market is looking for RBA to keep rates on hold at 4.35%.  You may recall that at the last RBA meeting they had even considered a rise in interest rates.  We certainly feel it is far too early for RBA to consider cuts.  AUDJPY could also be a cross with upside potential.

The next couple of days look pretty quiet on the calendar but Thursday we’ll hear from several Fed officials including Powell, while Friday brings the important PCE deflator figures from the US, one we know the Fed watches closely.  If this can stays in line with expectations we’ll be confident the Fed will be able to focus more on employment numbers.

A bit of excitement over the weekend in terms of sport.  Yesterday’s match between Man City and Arsenal was a bit of a cracker, with City managing to sneak a draw with a 98th minute goal after having had almost 90% possession in the second half.  Arsenal had had a player sent off in the first half for two yellow cards, neither of which I think they can really complain about.  Spurs managed to look reasonable as they beat Brentford to earn a much-needed three points. 

Antony Joshua managed once again to disappoint, losing to Dubois leaving a big question over his career.  A win would probably have set up a huge Joshua v Fury bout, but that is looking less and less likely.  Another sportsman who seems to have made a habit of snatching defeat from the jaws of victory is golf’s McIlroy, who lost a play-off at the PGA championship at Wentworth.

Otherwise, while Saturday turned out OK, we had a lot of rain here Sunday and it’s the same again today, indeed the forecast is pretty wet and gloomy all day.  Looks like summer is over!

Have a great day

-  09.00 EU PMIs

-  09.30 UK S&P PMIs

-  13.00 Feds Bostic speaks

-  14.00 ECBs Cipollone speaks

-  14.45 US S&P PMIs

-  15.15 Feds Goolsbee speaks

-  18.00 Feds Kashkari speaks

-  05.30 RBA rate announcement

-  06.30 RBA press conference

GBP up as BoE keep rates unchanged, talk of very gradual rate cuts

Good morning

BoE did leave rates unchanged yesterday in an 8-1 vote, Dhingra was indeed the dissenter.  This had been widely expected but feels more hawkish when we look at the scale of the Fed rate cut the day before, and the fact we’d thought at least one other member would see fit to vote for a cut.  GBP had a bit of a swing after the announcement, GBPUSD trading up to 1.3315, down to 1.3220, then back up to the high 1.32’s by the London close. 

This morning a very healthy set of retail sales numbers from the UK send GBP higher still, reaching 1.3340, while GBPEUR hit that 1.1930 area I mentioned yesterday afternoon.  It’s a bit weird as I’ve not met anyone who really thinks our economy is going great guns but, the GfK consumer confidence numbers released overnight were pretty horrific but, for now, with the divergence in UK rates vs US and EU rates, GBP gains could well hold and indeed extend further.

The next BoE meeting comes on 7th November, just a week or so after the budget which is not expected to be very kind on various members of the population.  Quite what will happen is yet to be seen but we may well want a rate cut in November to offset our increased tax burden!   There is an expectation we’ll get at least one 25bps cut this year, but BoE did make it clear our path of rate cuts is going to be very gradual.

BoJ kept rates on hold overnight, no major surprise there. USDJPY is trading up at 143.30 having seen a low this week around 139.60.  Its some way off but 144.45 is a key level for me, I don’t think BoJ will want to see it much higher and I’m sure they’ll be hoping that the Fed rate cut continues to depress the pair.

Worth mentioning the gains in US stocks, which saw the S&P500 up 1.7% to new record highs, Dow Jones up 1.3% and Nasdaq up some 2.5%.  Its an interesting quandary for the US stock markets.  A rate cut is always likely to push stock prices higher but if that rate is needed because of a slowing economy then surely it’s not such good news.  Anyway, Asian markets ended the week on a positive note as well but things aren’t looking so great for European markets so far this morning.

Canada retail sales out this afternoon, otherwise the calendar starts getting full of central bank officials following the various rate announcements this week.  BoEs Mann speaks this morning, it will be interesting to hear she has to say about yesterdays decision.  ECBs Lagarde speaks this afternoon, never known for big surprises, I’d imagine that will come and go with little fuss. 

We’ve had some decent weather this week, certainly the past couple of days, but as we head into the weekend I see warnings of thunderstorms that look set to bring rain into next week, and temperatures to push lower.  Ah well, we are nearly in October after all.  So, if the weather is bad we might just have to sit inside and enjoy some sport.  In the football, Spurs take on Brentford tomorrow afternoon but the key match will be Man City v Arsenal on Sunday.  We also have the PGA golf at Wentworth and world champion heavyweight boxing with Joshua vs Dubois. 

Have a great weekend as and when it arrives…

-  10.30 BoEs Mann speaks

-  13.30 CAD retail sales

-  15.00 EU consumer confidence

-  16.00 ECBs Lagarde speaks

-  19.00 Feds Harker speaks