Yesterday's ECB meeting threw no real surprises with the Bank electing to hold rates at 4% and consistent with the idea that the ECB are done with hiking interest rates further. ECB President Lagarde’s tone was considered dovish given the emphasis that the economy is set to weaken further. The probability of an interest rate cut in Q1 has risen as a result. The EUR weakened across the board.
Over in the US, there was further evidence of the US economy continuing to outshine its counterparts with economic growth in the third quarter coming in at 4.9% versus an expectation of 4.5%. Personal consumption came in at 4% and durable goods orders came in much higher at 4.7%. But, initially at least, USD weakened instead of gaining. It seems markets focused on the slightly weaker than expected core PCE inflation number for Q3 coming in at 2.4% versus 2.5% which weakened treasury yields. Equities also gained initially. But by the end of European trading hours, normal service resumed with USD gaining back and equities slumping further.
* Daily move - against G10 rates at 7:30am, 27.10.23
** Indicative rates - interbank rates at 7:30am, 27.10.23
Given the reaction to the core PCE numbers for Q3 yesterday, we will be watching USD and equity price action with the release of September's Core PCE deflator numbers. Markets are expecting a lower print of 3.7% from August's 3.9% print and should we see a lower-than-expected print then we would expect to see treasury yields drop like yesterday and of course taking USD weaker and equities higher. Personal income and spending figures will also give us a gauge of the relative strength of the consumer and the economy in the US.
Chart of the day
Over the last few months, the diverging growth differentials between the UK and US as well as higher US treasury yields have been pushing GBPUSD lower. Alongside this, we must consider GBPUSD’s strong correlation with risk appetite and performance with stock markets. It seems we are coming into a phase where the risk premium is increasing alongside the expectations of market volatility (See VIX below). Equities have been dropping on the basis of a lower growth outlook alongside higher borrowing costs. The last time we were in this situation was back in 2008…and we all know what happened back then. A further decline in equities and we are likely to see a negative impact on GBP across the board.
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