We warned yesterday that GBP was sitting on a cliff face and if inflation was not as high as expected it might well drop off and that was just the case when inflation came in significantly below estimates, within minutes the probability of an August rate hike dropped from 77% to 67% and GBPUSD fell almost 1%, bringing its weekly loss to just over 2%. Currently in the UK there is clear evidence of growth slowing, inflation stagnating and real wages falling – as we keep saying this is not an environment to raise interest rates and given GBP is still currently pricing in a 68% probability of a hike (after a slight uptick overnight) in the next meeting. This leaves the pound open to considerable downside shock should the BOE fail to raise interest rates, or should the market begin to price that possibility out.
The pounds only hope for a rally is a hawkish BOE and a rate hike. Intraday we may see the pound get some reprieve, retail sales are expected to have grown 3.7% through June marking a slight slowdown in growth from May, albeit a firm figure. However any sign of a weaker high street and the pound will be under serious pressure. 1.3000 still remains as pivotal support for GBPUSD, a break below there however and 1.2700/1.2800 area will come into focus very quickly. EURGBP is on the rise, despite the single currency facing its own weakness the overriding downside sentiment to GBP could well see us trade up to .8960. While .8830/.8800 area is now a firm base of support and will be tough to break lower. Markets beginning to give up on Brexit, or so it feels. We’ve been saying all along that until PM May can get her own house in order any hope of a workable deal with the EU is a long shot. The sticking point here is not the EU. It’s the fact that the UK government cannot agree internally what needs to be done. The longer it goes on the harder Brexit looks and the weaker the outlook for the pound.
It wasn’t just the UK that was facing weaker than expected inflation, the Eurozone suffered the same fate and the single currency faced almost instant selling. Once again the story is the same. Inflation is a metric closely watched by the ECB and even despite inflation sitting at the ECB’s target of 2%, they still are showing no indication of raising interest rates any sooner than the end of next summer. We are looking at a minimum of another year of record ultra low interest rates but yesterday’s core inflation reading of .9% vs 1% expected stirred some additional euro selling. 1.1600 acted as support for EURUSD and we’re back towards that level again this morning following a rally back towards 1.1660 yesterday (that level now light resistance). A break sub 1.1600 and we should find ourselves moving towards 1.1550 area quite fast and the pivotal 1.1500 area below.
The USD index continues to press towards those 12 month highs. Not too much in the way of new info from the Fed yesterday and data not really adding to anything USD based. At the end of the day the Fed looks solidly on path to hike twice again this year. Markets larger concern is on trade wars now, and with a lot of negative media hitting Trump this week one can’t help feel something has to give somewhere.