USD keeps going from strength to strength following the much higher-than-expected ISM services numbers yesterday afternoon, suggesting that inflation risks still remain in the economy. As a result the prospect of rate cuts next year by the Fed continue to reduce, with US treasury yields continuing to climb and equities weakening.
GBP took a hit in the afternoon after Governor Bailey stated that inflation will likely fall this year, and that we are near the top of the Bank’s rate hiking cycle.
* Daily move - against G10 rates at 7:30am, 07.09.23
** Indicative rates - interbank rates at 7:30am, 07.09.23
GBP has started the day lower following on from Governor Bailey's comments yesterday, which caused money markets to scale back additional interest rate hike expectations. The impact of higher rates is trickling down into the economy with Halifax reporting that house prices fell at the steepest rate since 2009. Average house prices are now £279,569.00, down by 1.9% in August alone. GBPUSD is now at a new 3-month low, having gone through a prior support level for GBP.
Speaking to participants in the market, demand for USD continues to build in size, as US data continues to suggest that the US economy remains resilient as well as evidence that inflationary pressures remain persistent. We have several Fed speakers today, and if there are any further comments to back the higher-for-longer rates narrative then USD should continue to gain. We have initial jobless claims today.
The EUR managed to recover yesterday, but should the final read of GDP for Q2 come in lower, then expect the EUR to weaken on the stagflation narrative. We also have several ECB speakers today.
The impact of the ISM services on the US economy can be seen below, and with the numbers continuing to climb higher it seems that we could see a higher print of GDP for Q3 as well over in the US. The data further supports the idea that the US economy will be able to withstand higher interest rates for longer.
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