Demand for the USD picked up in the afternoon after first quarter growth was revised higher from 1.3% to 2%. US treasury yields rose as a result, causing GBPUSD to hit a two-week low and EURUSD a week low. Year-end interest rate expectations continued to rise also.
Inflation in Germany rose in June from 6.1% to 6.3% year-on-year, but the outperformance of the USD overshadowed any performance for the EUR.
Whilst UK business confidence rose to a 13-month high in June, growth data this morning suggested lacklustre growth of 0.1% - GBP performance mixed so far.
* Daily move - against G10 rates at 7:30am, 30.06.23
** Indicative rates - interbank rates at 7:30am, 30.06.23
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All eyes on USD and EUR today with inflation numbers due for release. Europe's headline inflation number is expected to ease to 5.6% led by lower energy prices, whilst the core number is expected to rise. The Fed’s preferred measure of inflation is expected to ease from 0.4% in April to 0.3%. The USD has outperformed this week, and any suggestion that core PCE is not easing will add to further rate hikes being priced by markets. GBP is set for its second weekly loss despite yields on gilts continuing to climb – further suggestion of decoupling.
It seems markets are slowly starting to believe the Fed and their calls for further interest rate hikes. Prior to yesterday's GDP numbers from the US, markets were only pricing in one hike of 0.25% before the end of the year. The higher revision to 2% has now caused markets to price in a 50% chance for another hike this year, backing calls by Fed Powell this week that he sees two more hikes this year.
It's worth noting US growth versus UK as can be seen below. Yet the markets continue to price in 1.25% of additional rate hikes from BoE this year in an environment of anaemic growth. Question must arise, is the UK economy resilient enough to withstand these hikes?
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