US inflation numbers lightly undershot expectations with the headline reading only rising to 3.2%. Core inflation eased to 4.7% as expected and initial jobless claims came in higher at 248,000. We said in yesterday's report, that the markets were expecting a slightly softer reading, so the negative impact was mostly priced in. So it wasn’t a surprise to see the initial losses seen on USD following the data swiftly reversed by the end of the European trading session. Overall yesterday, the EUR was the big winner and GBP was lower across the board.
* Daily move - against G10 rates at 7:30am, 11.08.23
** Indicative rates - interbank rates at 7:30am, 11.08.23
Price action post the inflation number was very interesting with USD reversing losses and finishing stronger by the close of European trading hours. With inflation falling amongst most economies, interest rate expectations may well not be the key driver on USD movements with focus being on the strength of the economy – see below the decoupling between interest rate hike/cut expectations and the value of USD. The University of Michigan sentiment data today will provide a gauge for confidence in the economy.
GBP is starting the day higher after GDP numbers for Q2 came in better than expected at 0.2% versus 0.1% in Q1. Since the initial jump, GBP has stabilised. The news will be welcomed by Rishi Sunak ahead of a general election expected next year but analysts are not confident that growth will continue to rise for the rest of the year as the impact of interest rate rises will likely weigh on the economy for the rest of the year.
Looking at price action on the US dollar index since the end of July it's clear to see that the USD movements don’t seem to be dictated by interest rate expectations. Interest cut expectations have gone from expecting approximately 20bps worth of rate cuts in June to now 58bps worth of cuts and yet the USD has actually strengthened.
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