News & Analysis


The pound, like other risk and growth sensitive currencies, was driven by broad dollar gyrations in yesterday’s session. Following the slip in Q2 GDP figures out of the US, the pound retraced early losses to close the day 0.19% higher. This morning, with risk assets better supported, the pound trades a third of a percentage point higher, in line with the early move in the euro. Today, net consumer credit data for June at 09:30 BST is the only notable data release out of the UK.


Inflation data out of Germany defied expectations yesterday as the month-on-month print came in at 0.9%, substantially above the expected 0.6% reading. While this had limited impact on the year-on-year figure due to base effects, the data highlights that price pressures are yet to materially soften in the euro-area’s largest economy despite government intervention in transportation and fuel markets. The German data is likely a precursor for today’s eurozone reading, which by many accounts should increase by 0.1 percentage point from 8.6% when released at 10:00 BST this morning. However, with inflation data out of France and Spain both exceeding expectations this morning, a print closer to 9% is more likely. This should firm expectations of another 50bp hike by the ECB in September, offering the euro further support heading into the weekend.


Volatility remained abundant in G10 FX markets yesterday, driven by the Fed’s new data-dependent reaction function. The dollar trading softer against the majority of G10 currencies ahead of the New York open before traders started to fade the rally in risk assets with the release of advanced Q2 GDP on the agenda at 13:30 BST. At -0.9% QoQ annualised, the release saw the US economy meet the parameters for a technical recession to be called as the economy notched negative growth for two consecutive quarters. However, with the NBER taking a wider definition of a recession, it is unlikely that the US economy will officially we labelled as such. While the data had many volatile components contribute to the negative reading, markets can’t ignore the reduction in final sales (from 2% in Q1 to 0.3% QoQ) and consumption growth, which fell to just 1% relative to the average pace of 2.6% in 2017-2019. Upon the release, front-end Treasury yields plummeted, ultimately falling over 13 basis points on the day, while dollar downside was extended. The Japanese yen, which has been under substantial pressure year-to-date due to widening real interest rate differentials with the US, finally found some support as pressure from US rates subsided and growth concerns fuelled a haven bid. The yen led gains within the G10 space, rallying over 1.6% on the day, however, daily returns in FX markets didn’t follow the usual risk-off recession playbook. Higher beta currencies, which usually sell-off in such an environment, also rallied with NZD sitting as the second best performing currency on the day. This morning, volatility remains elevated as USDJPY trades over 1.2% lower on the day as market continue to trade lower growth and rates in the US. The focus may shift later today with the release of the US Q2 employment cost index at 13:30 BST. Should the data defy expectations of cooling and continue to print near Q1’s record high of 1.4%, the prospect of a 75 basis point hike at September’s meeting will be dragged back into the mix for short-term interest rate markets under more persistent core inflation pressures.


Owing to Canada’s close economic integration with the US, the loonie lagged the broad rally in risk assets yesterday following weaker than expected US GDP data. A drop in oil benchmarks likely contributed to the loonie’s underperformance, which continues this morning despite US equity futures pointing to another stronger open. Growth conditions will remain front and centre for USDCAD traders today as May’s growth data is set for release at 13:30 BST/ 08:30 ET. Growth is set to slow marginally on the month, but should still be tracking high enough across Q2 to keep the BoC undeterred in their hiking cycle.



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