US AAA debt rating under threat

Market reports
Thanim Islam
  • UK core inflation hits 30-year high
  • Germany enters into a recession
  • USD rises to 2-month highs



Yesterday’s hot inflation numbers from the UK, whilst forcing the peak of UK interest rates higher up to 5.5%, failed to keep GBP at elevated levels following the immediate announcement of the data. One interpretation of price action could be the idea that higher inflation leading to potentially higher interest rates could ultimately force the UK into a recession. Another interpretation could be the fact that we have one more inflation reading on the 21st June before the BoE meeting on the 22nd June, and markets may not rush to get ahead of themselves to push GBP higher.

Bank of England Governor Bailey said inflation has “turned the corner” despite soaring food prices, but warned the Bank has “very big lessons to learn” over its failure to forecast rising inflation.

Germany’s IFO index came in lower than expected for the first time in six months, illustrating that the confidence seen at the start of the year seems be dwindling. This continues the theme of weaker than forecast German data.

The USD continued its trend higher with the USD index making 2-month highs, taking GBPUSD to a new 5-week low, and EURUSD to the lowest since 24th March. Fed rate cut expectations continue to reduce in the markets, adding demand for USD.

NZD was the biggest loser yesterday out of the G10 after the RBNZ signalled that they are at the end of the tightening cycle.


Market rates

* Daily move - against G10 rates at 5:00pm, 24.05.23

** Indicative rates - interbank rates at 5:00pm, 24.05.23

Data points


  • EUR - ECB De Guindos, Nagel, Cos, Centeno
  • GBP - BoE Haskel
  • USD - Fed Barkin, Colins

Our thoughts

The US debt ceiling saga continues with news out overnight that credit ratings agency Fitch has put the US AAA rating on negative watch for a possible downgrade. The debt talks are set to continue with Treasury Secretary Janet Yellen once again warning the US Government will run out of cash by early June.

Paradoxically the dollar has benefited thus far from fears of a US default as safe-haven flows have helped support the currency.

Despite markets still aggressively pricing in US rate cuts for the 2nd half of this year, last night’s Fed minutes revealed whilst many members are leaning to a rate hike pause in June, many favour continuing hikes from July as inflation remains stubbornly high. Adding to this, Fed member Bostic warned interest rates may not start to fall until next year.

German Q1 GDP data released this morning came in below market forecasts at -0.3%, meaning the economic powerhouse of Europe has now entered into a technical recession.
Sterling is caught between higher yields supporting the currency, and increasing fears of higher interest rates for longer will cause the UK economy to also enter into a recession later this year. Tomorrow we will get the latest read on the UK consumers when retail sales data for April is released, which is expected to show a fall of 2.8% in April.

Today’s US GDP release will be closely watched by market participants ahead of tomorrow’s key PCE (Fed’s preferred measure of inflation) data release.

Chart of the day

With markets adding to rate hike expectations across this year, you would think that GBP will have continued its push higher. However, a strong level of resistance continues to keep the GBP index capped under the June 22, August 22, and May 23 highs. As much as GBP has been one of the better performing currencies this year, there clearly seems to be some doubt in the markets about pushing GBP higher. Perhaps, as mentioned above, markets are waiting for the next BoE meeting in June for guidance to suggest that the BoE will be hawkish in their interest rate guidance for later this year? Or perhaps there is renewed concern that raising interest rates further could force the UK into a recession?

Source: Bloomberg Finance L.P.

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