Written by Convera’s Market Insights team
Pound jumps to 4-month high
George Vessey – Lead FX Strategist
The UK economy grew at double the expected rate in May, expanding by 0.4% on a monthly basis, compared to an estimate of 0.2%. Such a reading reinforces the idea that the economy is doing well enough that tackling inflation at the last mile becomes that much trickier, and a Bank of England (BoE) interest-rate cut in August less likely. The pound extended gains, with GBP/USD rising above its 200-week moving average resistance level (currently $1.2848) for only the second time in a year. GBP/EUR is testing its 100-month moving average in the upper €1.18 region – another crucial resistance area.
Even before the upbeat GDP data, BoE Chief Economist Huw Pill hinted that rates in the UK might not come down from 16-year highs next month, referring to lingering concerns about stubborn price and wage pressures. In particular, the rise in services prices is a sign of uncomfortable strength in underlying inflation. The UK’s annual rate of inflation fell to the BoE’s 2% target in May. However, services inflation came in at 5.7%, easing only a little from the 5.9% rate recorded in April. Pill’s comments suggest he is unlikely to vote for a rate cut at the August meeting. We think the odds of a cut are greater than markets expect, especially if the UK inflation report next week continues to point to easing price pressures. However, today’s strong GDP data has weakened our conviction, and any overshoot in the inflation numbers next week will be the main risk to our base case scenario.
Thus, the short-term outlook for the pound remains one of vulnerability given the macroeconomic backdrop. Yield differentials might shift in favour of the euro in the coming months if the BoE ends up cutting more than markets expect, but if the BoE stands pat, €1.20 could be on the cards. On the political front, the Labour party’s focus on economic stability and strict spending rules, as well as closer trading ties with the EU could restore the country’s safe-haven status and this would also support the pound over the longer term.
CPI needed to shake up FX market
George Vessey – Lead FX Strategist
Risk appetite is buoyant across financial markets. The Hang Seng Tech index rallied as much as 2.5% overnight and mainland China indexes pushed higher after Beijing’s latest market-supporting measures. The US dollar is on the backfoot against most majors with the Aussie, kiwi and sterling topping the G10 leaderboard.
Global currency volatility has continued to drop rapidly as markets await developments on Eurozone and US politics, as well as on the data side. This, along with stimulus measures announced from China, has helped boost cautious risk taking across financial markets, hence the rise in equities and high-beta FX. But today’s pivotal CPI release in the US may also be behind this week’s cautious trading, yet hedging costs in EUR/USD ahead of this data print haven’t been this low since late 2021. EUR/USD overnight volatility is up by as much as 157 basis points to 9.26%; breakeven comes around 50 pips, lower than the implied roll a few days ago. Relatively low hedging costs reflect the fact that markets think Fed officials are more concerned about labour indicators than price pressures for the time being.
That being said, a soft CPI report today could make for further US dollar weakness and allow GBP/USD to stretch above $1.29 and EUR/USD towards $1.09, as the odds of two rate cuts by the Fed this year would likely jump.
Euro mildly bullish ahead of US CPI
Ruta Prieskienyte – Lead FX Strategist
The euro, along with most of the majors, has been caught in a tight range, trading virtually unchanged relative to the start of the week against an extremely quiet data backdrop. Both the Stoxx 50 and the Stoxx 600 gained on Wednesday, following a three-day losing streak, while European bonds also closed higher. Given a light start to the week for economic data, markets continue to struggle for direction awaiting the US CPI report due later today.
EUR/NOK was in for an exciting session. The pair rallied over 1.1% to a 7-week high as Norway’s underlying inflation rate fell to the lowest level in more than two years, raising prospects that the country’s central bank could reduce borrowing costs before the end of this year. Large movements were also seen in the EUR/NZD spot. The euro gained 0.8% against the Kiwi after the Reserve Bank of New Zealand held interest rates steady for the eighth consecutive meeting but acknowledged significant progress towards bringing inflation back within its target range. Meanwhile, EUR/CHF approached a near 1-week high and has recouped over 2.6% of losses since mid-June trough. However, markets are expecting a significant drop in volatility from here on. One-month implied volatility in EUR/CHF dropped a 17th consecutive day to hit its lowest level since Feb ’22 amid a wanning safe haven demand and the French fiscal risks now seen a long-term play.
EUR/USD drifted to the middle of the weekly range of $1.0805 – $1.0845 as investors anxiously await the June US CPI print. The overnight EUR/USD volatility traded at a MTD high of 9.3% and the spot momentum heading into today’s session is mildly bullish. Looking at the options market, the one-week risk reversals remained stable at -0.223, in favour of euro puts, the least bearish sentiment positioning since Macron announced the snap election on June 9.
Sterling continues surging across the board
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: July 08-12
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
