USD finds support despite weak ISM data

Good morning

Yesterdays release of the US ISM PMI saw another weaker than expected result which initially sent USD running for cover.  GBPUSD traded to 1.2710, EURUSD to 1.0770, but that move reversed almost immediately, with GBPUSD and EURUSD trading down to 1.2635 and 1.0720 respectively, and the USD held most of those gains overnight, we are trading close to those levels now.  USDJPY slipped back below 161.00 on the ISM release but within an hour or so it was trading at new highs around 161.70, still no sign of intervention by Japan. 

I have seen no sensible explanation as to what caused the USD turnaround in the face of the weak ISM reports.  Perhaps the news that Trump is unlikely to face trial before November for his involvement in the attacks back on January 2021 helped the US dollar.

ECBs Lagarde suggested ECB would keep rates on hold at their meeting later this month, saying they do not yet have sufficient evidence that inflation threats have passed.  At least one more 25bps cut from ECB is expected this year, a pause in cuts in July looks most likely, but we could see a cut in September.  Anything beyond that will be dependent on incoming data and, to some extent, rate moves from other major central banks.   

RBA have continued to warn of upside inflation risks, no great surprise after last weeks higher than expected CPI release from Australia. Indeed, following that AUS CPI announcement last week I have seen a couple of major banks, such as UBS and Deutsche, look for a rate rise at the next RBA meeting in early August.  There certainly seems little hope of a rate cut this year as RBA priorities remain fixed on getting inflation lower.  AUD remains supported, with GBPAUD just around the 1.9000 level. 

EU inflation is out this morning, where a slight drop from last month is expected, it would take a substantial shift lower for July rate cuts to be back on the agenda.  We hear from various ECB officials at the Sintra forum today, including ECBs Lagarde and Feds Powell this afternoon.  We will also have the first US jobs data of the week in the form of JOLTS, ahead of ADP and Challenger tomorrow, before the main event of nonfarm payrolls on Friday.

We had some exciting football yesterday, France scraped a late win over Belgium courtesy of an own goal, while Portugal got through to the quarter finals having been taken all the way to penalties by Slovenia.  It’s not just England who are struggling to find their form in this tournament.  We have Romania v Netherlands and then Austria v Turkey.  Austria have been something of surprise so far having topped their group, can they continue this form?  It’s getting exciting. 

In other news, BBC reports that from the end of next year, electric vehicle owners will have to pay the standard London congestion charge.  So far, electric vehicles are exempt if they pay a £10 annual fee.  This change is said to be in order to relieve congestion further, however I think we all know that with such exemptions come a loss of income and over time such exemptions are removed.  I’m waiting for the time ULEZ fees are charged on electric vehicles, perhaps changing it to a ‘road-usage tax’ instead.  Might not be soon, but we know it will happen eventually.

Otherwise, attention is of course on the UK general election.  We’ve seen little in the way of impact on GBP so far.  I’m sure that previously GBP had struggled when Labour looked like getting in power, this time though it seems reasonably supported despite the very high chances of Labour getting elected with a huge majority.   

Have a great day

-  09.30 ECBs Elderson speaks

-  10.00 EU HICP, unemployment

-  11.30 ECBs Schnabel speaks

-  14.30 CAD S&P manufacturing PMI

-  14.30 ECBs Lagarde speaks

-  14.30 Feds Powell speaks

-  15.00 US JOLTS job openings

-  02.30 AUS retail sales, building permits

-  02.45 China caixin services PMI

The right-wing comes good after all. That's where England's goals came from...

Good morning

I’m back from holidays, and what a marvellous holiday it was.  It seems a long time since I’d felt real warmth from the sun, certainly on a regular basis, and ah how lovely it is.  I know much of the UK had high temperatures for a few days while I was away, I arrived back too late for those, but I have to say the last day or so back home has been far more pleasant than the weather we had before I went away.  Lets hope it stays that way.

So, what have I missed?  Well ‘plenty’ is the answer and there is no way I am going to cover it all in this email.  We have left H1 2024 behind and have moved into H2, so I won’t go over too much old ground now, although I will mention that from what I read we in the UK could be in for a rate cut as early as next month if the last BoE meeting was anything to go by.

In terms of currencies, GBPUSD isn’t too far from where it was when I wrote my last report back on 14th June.  At the time it was 1.2705, now 1.2680, having seen a low around 1.2620 while I was off.  GBP has lost ground against EUR over the past couple of weeks, it had traded up to 1.1900 but has since slipped back to 1.1770, while EUR has also made gains against USD from the 1.0700 area up to 1.0770 where we currently trade. 

The EUR has gained over the weekend on the French election first round results, where Le Pen’s right wing party National Rally won 33.1% of the vote, pushing Macron’s Ensemble Alliance into third place with just 20.76% of the vote, second place went to the left-wing New Popular Front with 28%.  EUR gains were prompted by the failure of National Rally to earn an overall majority, which would make it nigh on impossible for them to introduce the immigration and tax cuts that they promise.  Second round voting is next weekend and already the failing parties are talking of ditching marginal candidates in order to try to consolidate votes for one left-wing candidate, but it seems that France is on course for a rather unsettled political playing field.  Worth noting the high turnout for this election, nearly 67%. 

USDJPY has traded up to new multi-year highs, reaching 161.20 or so with no sign of intervention from Japan.  162.00 is a level being talked about although unless we see action from Japan I can see this being tested, with the strong USD and weak Yen staying until such a time US cut rates and Japan raise rates.  GBPJPY up at 204.00.

Of course we have the UK election coming up later this week.  The right wing will not do anywhere near as well in the UK as we saw in France this time, the big question here is how many seats Reform can take, and perhaps more importantly whether they take them from Labour or Conservative.  Labour look set to win with a landslide victory as the public lose faith in the Tories, who stand to lose 275-300 seats.  A key issue for me with both parties is that they are all in it for themselves, serial politicians, rather than really being in it for the good of the country.  They’ll do anything to hold onto their jobs regardless of whether it’s the right or wrong thing.  I see no difference between Tories and Labour in this respect.  Anyway, I will be interested to see the turnout this time around.  Back in 2019 it was 67.3% across the UK.  I think we have a chance to substantially exceed that this time although of course there is still a chance voters such as old Tory voters stay away, not willing to vote again for their party but unwilling to place a cross against a Labour name. 

And of course we have the ongoing US presidential battles in the US.  Still some months to go before the vote itself but the televised debates have started and I have to say it doesn’t look good for Biden, who is clearly suffering from some sort of illness, with stiff body and vacant expressions.   He can’t be well enough to be President.  Will he stand?  And if not, who will stand instead?  Kamala Harris, current vice-president, has been rather quiet.  Mind you Biden has to withdraw in order to be replaced unless the cabinet declared him unfit for office, something that has never happened before. 

Meanwhile, I read that several US bases across Europe have raised alert levels to their second highest level possible which suggests they have intelligence that a terror attack against the base is likely.  Some suggestions are that the ISIS group that led the recent terror attack in Moscow have been thwarted in trying similar attacks in France and perhaps there is a fear they will target US military personnel off-base. 

In sport, Wimbledon begins today, the weather looks good enough and I’m sure the players will be pleased to be playing in temperatures around 20°c rather than 30°c, although I’m sure the general UK public would prefer the weather to be warmer.

Of course, for me, the main event remains Euro 2024.  I have to confess that much of our down-time on holiday was spent watching football regardless of who was playing.  Most bars and restaurants had at least a couple of screens, so it was difficult to avoid, and we did end up seeing more than I’d expected.  I was back in time to see England play yesterday evening, I won’t go into detail about my feelings for the match, save to say that over the whole tournament so far, England have really shown just ten minutes of the intensity levels I’d expect, towards the end of the 90 minutes yesterday when it looked as though the team would be heading home. The win is all that matters but something just isn’t working.  Quarter-finals beckon, but we’re going to have to improve if we have any chance of beating the likes of Germany or Spain.  Both England goals came from the right wing, I’m surprised the UK papers hasn’t picked up on that political connection as yet.

That’s all from me for now.  US ISM this afternoon likely to be the key, Lagarde speaks later this evening, it will be interesting to see if she makes any mention of the French elections.  US employment numbers out this week with nonfarms on Friday, and of course we also have the UK election to keep us busy.

-  13.00 German HICP

-  15.00 US manufacturing ISM

-  20.00 ECBs Lagarde speaks

-  23.00 NZ NZIER business confidence

-  23.45 NZ building permits

-  02.30 RBA minutes

GBPEUR higher, for once at a decent level before my holiday. See you in a couple of weeks

Good morning

US inflation back on Wednesday came in lower than expected, leading to a bout of USD weakness that saw GBPUSD trade up to 1.2860 and EURUSD up to 1.0850.  A hawkish FOMC rate meeting, which lowered the number of indicative rate cuts in 2024 from three last time out to just one this time, then served to push the USD higher and by close of play yesterday both GBPUSD and EURUSD were below the pre-CPi levels, at 1.2750 and 1.0750, indeed as I type they are 1.2730 and 1.0705 respectively.  This came despite softer than expected US PPI numbers yesterday, we did see a brief USD sell-off on that release but it didn’t last long. 

So although this latest set of inflation data from the US suggests its moving in the right direction, the Fed are not comfortable enough yet to be thinking of rate cuts.  They’ll need to see a few months of similar data to give them confidence that lower inflation is sustainable before cutting rates.  Powell suggests the Fed is expecting good, but not great, inflation readings in the coming months, which explains why they are cautious with rates. 

It is worth noting however that had we seen just a couple of different ‘dots’ the median would have been for two rate cuts and things would have been a little different.  Indeed, I think the dots were entered by Fed officials before they had seen the inflation numbers, so it is more than possible that had they waited we could have had a median suggesting two rate cuts, which would have given a very different spin on the FOMC announcement.  Perhaps it wasn’t quite as hawkish as the market read into it.

The Euro continues to struggle against GBP after the ECB rate cut, the EU election results and the news that parties on the left in France may seek a coalition called ‘Popular Front’ in an effort to counter the right wing National Rally in the upcoming snap election, which puts Macron in a very difficult position in the middle.  GBPEUR is now up at 1.1890, I do wonder whether GBP will also come under pressure as we near the UK elections but so far GBP is holding up well.

The US Dollar has not been greatly impacted by the news that Saudi Arabia will be open to settling oil transactions in currencies other than USD, such as Euro, Chinese Yuan and Japanese Yen, and perhaps even some crypto currencies.  This is a fairly significant shift in global oil trade and should see demand for USD drop, given countries that import oil may no longer need US dollars to pay for their oil.  China is a huge importer of oil and will certainly prefer to trade in CNY than USD. 

Overnight we had the BoJ rate announcement, no surprise that rates were kept on hold as widely expected, but we have seen some Yen weakness after BoJ failed to come up with a detailed plan on reducing bond purchases.  They did announce a reduction but said they’d only announce details at the next meeting at the end of July.  Many regard this as making a rate rise at that meeting less likely.  USDJPY is up at 158.00, we look out for any further intervention but lasting USDJPY declines will really need BoJ rate rises and Fed rate cuts. 

In other news, BBC are reporting some 6,000 possible illegal raw sewage spills in one year.  Water companies are allowed to discharge untreated sewage into rivers and seas when it rains but are not allowed to do so in the dry.  The BBC suggests far more is discharged in dry days than previously reported, although the water companies dispute the findings.  I have no time for water companies, many of whom have borrowed huge sums of money, failed to invest appropriately in their infrastructure while still paying hefty dividends to shareholders.  Daylight robbery.

On the subject of large payments, hats off to Elon Musk who has seen his Tesla shareholders agree a US$55bn payout that had previously been stopped by a Delaware court.  Tesla shares haven’t done so well recently, trading at less than half their peak value from 2021 after a fall in profits and thousands of job cuts.  It’s a huge sum of money to be paid, OK he did create the company and has steered it to success, but $55bn?  That’s incredible. 

I’m on holiday from this weekend.  Like many I am a bit fed up with this cold weather and I’m looking forward to feeling some proper warmth on my face.  I’ll be missing next weeks all-important day for the UK, with inflation on Wednesday and BoE rate announcement Thursday.  No rate change is expected from BoE, although there is hope that both headline and core inflation will come in lower than last month.  I’ve seen suggestions we could be looking at a headline around 2%, down from 2.3%, and a core reading as low as 3.4%, from 3.9% last time.  I’m not sure even those would be enough to encourage BoE to consider a rate cut, we’ll see from the vote split whether any members join Ramsden and Dhingra, they voted for a rate cut at the last meeting in May, the remainder voted to keep rates on hold back then in a 7-2 vote split.

The Euro 2024 tournament begins today with Scotland taking on hosts Germany in the first match.  I have every reason to think this could be a terrific tournament.  We may not see big results, matches are likely to be tight and niggly at times, but I’m sure we’ll see some upsets.  England are still favourites, but odds have lengthened to 4-1, almost the same as second favourites France.  Portugal at 7-1 looks like a decent bet, as does Italy at 18-1, although they have a tough group to get out of, with Spain (5th favourite at 9-1) and Croatia (ninth favourite at 45-1).  I’d love to think England can win, on paper we have some great players, but I’m just not sure we’ll have the experience.

I hope the next couple of weeks goes smoothly for you in the world of currencies.  Remember, we are here to take the headache out of managing your currency requirements, whether you simply need to purchase or receive other currencies once in a while or whether you need to buy or sell other currencies in high volumes.  Of all the things you may need to worry about, our aim is to ensure that currency management is not one of them.  Our top-notch service remains the same even when one of us is away.

Have a great couple of weeks, back in July, just in time for the general election!

-  09.30 UK consumer inflation expectation

-  10.00 ECBs Lane, de Guindos speak

-  14.30 ECBs Schnabel speaks

-  15.00 US Michigan sentiment survey

-  16.00 US Fed monetary policy report

-  18.30 ECBs Lagarde speaks

-  19.00 Feds Goolsbee speaks