Volatility picked up in FX markets on a combination of factors. Stock markets and commodities all fell into the red, highlighting global growth concerns. Commodity currencies weakened off lower as a result, with notably GBPAUD and GBPNZD now at the highest levels since May 2020.
USD picked up as two-year yields surged to the highest since 2007, after jobs and service sector activity came in higher than expected, highlighting the resilience of the US economy and supporting the Fed's case for more rate hikes to come.
Trading on GBP was erratic yesterday, with sharp gains seen in the early part of the day, before easing off towards the end of the day. There was no fundamental driver behind this move, but similar to trading on Wednesday a sharp spike in volume caused the move.
UK housing data from Halifax showed that house prices in the UK are falling at their fastest annual pace for a decade, highlighting the impact of higher borrowing costs on the economy. With more rate hikes priced in by the markets, approximately an additional 1.5%, further damage could be seen considering approximately 800,000 fixed-rate mortgages will need to be refinanced for the rest of this year, and a further 1,600,000 in 2024 (Source: UK Finance).
* Daily move - against G10 rates at 7:30am, 07.07.23
** Indicative rates - interbank rates at 7:30am, 07.07.23
After a robust set of numbers from the US yesterday, particularly with the ADP payroll numbers coming in spectacularly higher, all eyes today on the nonfarm payroll numbers in the afternoon along with wages. Same again, numbers to suggest the economy is still firing on all cylinders should add further demand for USD.
The housing data from the UK this morning highlights the concerns on the ability for the UK economy to absorb additional interest rate hikes in the UK, and that concern seems to be playing on minds in the market. Yields on gilts continue to climb higher. and yet GBP isn’t tracking the move. Time will tell if whether these concerns are validated or not.
With a spike in volatility yesterday, also worth keeping an eye on equities to gauge risk appetite. and see which currency could be most effect by risk dropping.
UK house prices continued their downward trend in June, dropping at their fastest pace since 2011 as higher borrowing costs continue to weigh on households. With the base rate at 5%, and the average two-year mortgage rate approximately 6.5%, we must ask ourselves the implications on the property market and the economy should interest rates rise to 6.5%, as currently priced in by markets. GBP remains the best performing currency amongst the G-10 year-to-date, but headwinds are growing, and is time running out to remain on top?
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