Eurozone PMIs continue to paint a picture of an underperforming economy with the composite of services and manufacturing activity now in contraction territory. We saw recent GDP data from the EU show the economy contracted in the first quarter, and the deteriorating PMI activity numbers suggest even slower growth in the second quarter. The respective UK numbers came in-line with previous forecasts. US durable goods orders came in slightly higher than expected. Money markets amped up the UK’s interest rate expectations, putting 75% odds of a terminal rate of 6.5%, up from 100% odds of the terminal rate of 6.25%. Whilst GBP performed slightly better on the day, the surge in these expectations aren’t having the same effect on GBP as it has done over the course of the year. Interest rate expectations have climbed, but we are not seeing GBP make new highs, which once again brings about the idea of dislocation between between rate expectations and GBP performance.
Market moves ahead of the minutes from the latest FOMC meeting were a bit erratic around lunchtime, when we saw volumes spike on USD selling. But, this was short-lived with USD finishing stronger towards the end of the day.
The minutes from the latest FOMC meeting revealed a division amongst members, with some preferring to have hiked by 0.25% in June. As we know the Fed elected to pause last month. No notable moves on USD over the meeting.
* Daily move - against G10 rates at 7:30am, 06.07.23
** Indicative rates - interbank rates at 7:30am, 06.07.23
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The US in focus today with services PMIs and job numbers in focus. The resilience of the economy will be in focus, and the ability for it to absorb the Fed’s mantra of interest rates staying higher for longer. Two or more hikes have been suggested by Fed Powell, but money markets have to price this in. Should they catch up then we would expect demand to pick for USD. Eurozone retail sales will be key again as a measure of consumer confidence and what this means for their economy. GBPEUR is approaching previous rates/levels where we saw demand for the EUR pick up again. If the EUR buyers pile in again then this could limit further gains on the pair.
As mentioned above, money market pricing on terminal interest rates in the UK has continued to be priced higher to near 6.5%. However, the value of GBP has not followed this path and made higher highs, suggesting that perhaps interest rate expectations may not have as strong as an effect on the value of the currency as it has done year-to-date. Does this mean that perhaps we are near peak GBP FX rates?
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