After a strong performance in May, the USD starts June on the backfoot after manufacturing data came in lower than expected, although the ADP payrolls report came in stronger. The focus and driver in the markets for USD now is the suggestion that the Fed will skip a hike in June and remain open for a hike in July. Fed Harker doubled down on his comments from earlier this week by suggesting that interest rates are near a holding point, although he did add that disinflation is slow. GBPUSD was a big benefactor of the weakness on USD with the pair already retracing 62% of the May downtrend.
EU inflation come in lower than expected, causing GBPEUR to climb to new six-month highs.
The debt ceiling deal was approved by the Senate last night causing fresh appetite for risk, causing equities to climb.
Overnight markets repriced interest rate expectations higher from the Reserve Bank of Australia after the Fair Work Commission increased the minimum wage by 5.75%. As a result, higher wages, inflation, and house prices now puts peak interest rate expectations to 4.15% (current rate are 3.85%). GBPAUD has declined off recent highs as a result.
* Daily move - against G10 rates at 5:00pm, 01.06.23
** Indicative rates - interbank rates at 5:00pm, 01.06.23
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It's all about the job numbers today from the US following recent Fed speak suggesting that the Fed may elect to skip a rate hike in June. USD has been on the backfoot as a result, and unless we see a significant deviation higher on the payroll and hourly earnings figures, it seems that this weakness on the USD could well continue. Buyers of USD from GBP will welcome the recent move higher on GBPUSD, providing a window of opportunity to buy USD near the recent yearly high. Recent data from the UK has suggested that the BoE will need to hike interest rates further as inflation is now slowing quickly enough (a supporting factor for GBP). However, there are some that continue to argue that the BoE will not hike as much as what the markets are pricing, given housing market pressures and cost of living pressures. If this were to be the case, then we could easily see GBP come off these highs.
GBPEUR continues its climb higher yesterday with the pair now at 6-month highs with the December high now in sight. General weakness on the EUR has helped this, but as can be seen below the main factor continues to be the divergence in interest rate expectations between the BoE and ECB which was given a boost after data in May suggested that inflation isn’t slowing as quickly as expected. Current levels present a great opportunity to buy EUR.
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