With producer price inflation dropping more than expected we see a continuation of markets remaining risk on with equities having their best week since November and the USD continuing to lose ground. GBPUSD and EURUSD continued to push higher and made new 15-month highs. Despite this Fed speaker Waller continued to reiterate that the Fed will need to raise rates at least twice this year – a sentiment that’s not being felt by the markets with only one more rate hike by the Fed being priced in. Initial jobless claims fell to 237,000 suggesting that the job market remains resilient in the US.
* Daily move - against G10 rates at 7:30am, 14.07.23
** Indicative rates - interbank rates at 7:30am, 14.07.23
Very little out today for markets to digest and after a rock and roll week perhaps the market will take solace in this going into the weekend. GBP and EUR have been benefactors of the risk on mood in markets and on the flipside, the USD is the big loser. Focus next week for GBP will fall on UK inflation numbers on Wednesday and what this means for rate hikes. Headline inflation is expected to ease with the continuing fall in energy prices but it’s the core number that will be in focus particularly after this week's higher-than-expected wage numbers. UK retail sales on Friday will also be a key measure for growth and whether these higher wages are being spent in shops.
The other key data points will be China’s GDP and retail sales numbers on Monday, Canada’s inflation numbers and US retail sales on Tuesday and Europe's inflation figures on Wednesday.
A big and bad week for the greenback this week with the USD index falling below the 2023 low, a key support level as markets believe the Fed are close to the end of their rate hiking cycle and risk appetite continuing with equities having their best week since November. Going into next week there are a couple of things that could determine if this optimism in the market continues. China's GDP will be a good gauge of this on Monday morning and today second-quarter earnings season for US stocks kicks off. If the earnings season is interpreted as strong, then we will likely see this risk on mood in markets continue and thus add further decline on USD. If the earnings season demonstrates a pessimistic outlook then we could see a reassessment of the optimism so far this year and perhaps, this could see USD recover.
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