GBP lower on grim outlook / Is the tide turning for the USD?
Last week can be seen by many as a turning point for the direction of global interest rates, alongside confirmation that a global economic downturn is already underway – find here the thoughts of RedFX.
Ahead this week
GBP: A bad week for GBP after a 0.75% rise in interest rates which was accompanied with a negative outlook from the Bank of England and a signal that the UK has entered a long recession expected to last at least 2yrs.
Importantly, in a CNBC interview on Friday, the Bank Chief Economist Huw Pill said:
“We don’t think interest rates would need to rise as high as the market has been pricing, precisely because that would induce a slowdown in the economy that is bigger than is required to get these inflationary dynamics under control,”
In other words, markets need to re-anchor interest rate expectations to lower levels AND take into account an already slowing economy. This is all pretty sombre news from the UK, but GBP/EUR remains in the middle of recent ranges around 1.1400. GBP/USD has suffered, falling from 1.1600 levels only 2weeks ago.
USD moves on Friday:
Great US employment data was over-shadowed by weak labour participation data which showed a decline in participation to 62.2%. This is despite strong data and unemployment %age of 3.7%. Overall, the USD did not move.
30minutes later, the USD rapidly lost 1% as Fed member Collins said.
“It is time for the Fed to shift its focus from the size of rate hikes to the ‘ultimate "destination’”
"Smaller rate hikes may be likely to become more appropriate in future."
"Still open to 75-basis-point hikes if needed."
Fed member Barkin added to USD weakness as he said “Not sure I know what we'll do in December”. If we keep hearing comments like this, the market will start unwinding the recent USD strength in a meaningful way. GBP/USD had been around 1.1150 through the day but climbed to 1.1350 on the move.
EUR/USD had previously been trading at 0.9750 but was above 0.9950 on these comments
In addition to that, rumours that said, China was going to relax it’s Covid policy, which pushed the EURO higher – but over the weekend the authorities quashed these stories and the EURO has given back some of those gains. Weakness looks set to continue as the ECB drags its feet in relation to other nations monetary policy as inflation in the Eurozone hits 10%+.
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The RedFX Team