GBP had its worst day since March following those lower-than-expected inflation numbers, with notable falls versus G10 currencies. On the GBP index, the March uptrend was briefly breached, and we wait to see if this move lower is going to be sustained should additional support levels be breached as well.
Inflation in the eurozone dropped as expected to 5.5%, but core inflation climbed slightly higher to 5.5%. We saw initial gains on the EUR following this number, but as we approached the end of the day comments from ECB’s Stournaras suggesting that risks of raising rates too much could hurt the economy were taken as dovish, causing the EUR to sell off.
The AUD gained overnight after better-than-expected job numbers, with the unemployment rate dropping to 3.5%.
The impact of higher interest rates was mentioned in Tesla’s Q2 earnings report, with Elon Musk stating that the company will have to lower prices if interest rates continued to rise.
* Daily move - against G10 rates at 7:30am, 20.07.23
** Indicative rates - interbank rates at 7:30am, 20.07.23
Similar to GBP, the EUR has been well supported on the hawkish calls by the ECB and rate hike bets. If we are near the end of the hike cycle, then perhaps we are near peak EUR as well. On a technical basis it seems the EUR is overbought, and price action over the last two days suggests that perhaps the gains could be exhausted. Next week's ECB meeting and guidance will be very telling for future direction on the currency.
For GBP we look to see if the market continues to sell the currency, considering the easing of rate hike expectations. Price action at key support levels will be key to gauge further falls that could be seen on the currency.
Considering the UK disinflation story and a possible shift in ECB view, we saw demand for USD pick up yesterday as the currency attempts to climb out of oversold levels. Should today's US numbers come in stronger, then we will likely see continued demand for USD.
So, what does life after the peak interest rate repricing look like for GBP? Yesterday’s lower inflation print now puts peak interest rates at 5.8%, down from 6.5% only two weeks ago. GBP declined as a result, with the GBP index breaching the uptrend channel that has been in play since March. Should we see this breach continue going into the end of the week, and also a breach of the June 30th low, then further declines could be seen on the currency.
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