Is it time to U-turn?

Market reports
Thanim Islam
  • Eurozone too fragile for more rate hikes?
  • Goldman Sachs reduce EU growth forecasts
  • Waiting for the Fed's message


GBP had a surge late afternoon, with the GBP index broadly finishing higher on the day with no obvious reason behind the move. USD was broadly unchanged but the EUR continued to weaken. Earlier in the day IFO business survey data from Germany showed sentiment was lower than expected and action in the options market saw bets increase that the ECB may actually start cutting interest rates in September due to the fragility of the euro economy. Goldman Sachs yesterday reduced their growth forecasts for the continent to 0.4% from 0.7% previously on account of weaker-than-expected economic activity. Thursday's ECB meeting could be very interesting indeed.

The disinflation story continues with the numbers from Australia coming in lower than expected, causing markets to scale back rate hike expectations. AUD weakened as a result and GBPAUD remains near the March 2022 highs.


Market rates

* Daily move - against G10 rates at 7:30am, 26.07.23

** Indicative rates - interbank rates at 7:30am, 26.07.23

Data points


  • None today.

Our thoughts

The USD is slightly weaker this morning ahead of tonight's Fed meeting. Markets are widely expecting a 0.25% hike today and any market movement on USD will come from the accompanying statement by the Fed and hints on any additional hikes later this year. The key message that will likely support USD will be that rates will stay higher for longer and a pushback against rate cuts in 2024.

Chart of the day

Ahead of the ECB meeting on Thursday, the options market has been very active in betting that a rate hike in July could well be the last in light of a gloomier outlook for the Eurozone economy and that thereafter the ECB could well start to cut interest rates. This goes against money market pricing which continues to suggest that the ECB will conduct two more hikes this year. Should the ECB begin cutting rates in September then this would prove to be the fastest ever reversal of monetary policy conducted by the Bank. The accompanying rate statement from the ECB could prove to be very interesting. Any suggestions that these bets are right will likely continue the negative mood on the EUR.

Source: Bloomberg Finance L.P.

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