GBP lost ground yesterday as money markets eroded some of the recent interest rate hike expectations following on from Governor Bailey’s speech in Sintra. The GBP index now sits at a two-week low.
USD gained after Fed Powell continued to reiterate his hawkish stance, and that two or more hikes will be needed this year. The feeling in the market seems to be that given the resilience of the US economy, interest rates will stay higher for longer – very different to what markets were thinking last month when rate cuts were priced in.
Ahead of today's German inflation numbers, both Italy and Spain's numbers have shown that prices have continued to ease.
* Daily move - against G10 rates at 7:30am, 28.06.23
** Indicative rates - interbank rates at 7:30am, 28.06.23
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Fed Powell was also speaking this morning and continued to reiterate his tone from yesterday, adding to further support for USD. US data points will be in focus to illustrate the resilience of the economy with the weekly jobless claim numbers, and a third estimate for growth in the 1st quarter.
Following on from Italy and Spain's inflation numbers, German numbers will be out in the afternoon and any depreciation in prices could weaken the argument for two more hikes from the ECB.
Any continued repricing lower of implied future interest rates in the UK should prove to be negative for GBP.
What a difference a month makes. Since March and the banking crisis, markets were quick to price in rate cuts from the Fed by the end of the year. However, recent hawkish Fed rhetoric has now meant markets have flipped expectations to expect more hikes by year-end. With the economy remaining resilient, the market feeling seems to be the Fed may well be in a position to keep interest rates higher for longer.
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