US GDP revised downward

The US released their second estimate of Q2 economic growth data yesterday. Q2 growth was downgraded to 2.1% q/q, down from the first estimate of 2.4% but marginally higher than the Q1 figure of 2.0%. We also saw The US personal consumption expenditure index slide to 2.5%, down from 4.1% in the previous month. These are all signs that the US economy is struggling to climb out of the malaise created by Covid. We can see that concern manifested in the foreign exchange markets as weakness in the US dollar. The GBP/USD rate is 1.5 cents higher at $1.2715 this morning and the EUR/USD rate has gained just over 1 cent in the last two days. That pair sits at $1.0915 this morning. There were a couple of bright spots in yesterday’s US data. Pending home sales were up 0.9% on the month, a big improvement over the market forecast of a contraction of 0.6% and 177,000 jobs were created in the month to August. However, that was down from 371,000 in the previous month and lower than the market forecast of 195,000. We will get more employment market data in the form of the weekly unemployment claims numbers. That is expected to show a small increase to 235,000 or thereabouts. Whether that will be sufficient to continue the US dollar weakness is a moot point at this stage. What is clear is the fact that many in the market are now starting to contemplate a halt in US Federal Reserve’s monetary policy tightening, and if that view gathers momentum, we will see further US dollar weakness.

GBP consolidates gains

As mentioned above, many market commentators are starting to assume The US central bank is on the verge of ceasing any further interest rate hikes. Meanwhile, the Bank of England’s deputy governor Ben Broadbent, has talked about the UK’s central bank maintaining higher interest rates for longer. That juxtaposition has allowed the GBP/USD rate to push back towards the top of its recent ranges and the pound has made gains elsewhere as well. GBP/USD is up to £1.2715 and GBP/EUR is pushing towards the top of its recent range of €1.16 to €1.17. In addition, GBP/AUD was up to AUD 1.9645 overnight, although it has slipped a tad on profit-taking taking and the GBP/NZD rate is above NZD 2.13 again. We will have a speech from another BOE member today. Huw Pill is the Chief Economist and Executive Director for Monetary Analysis and Research for the BOE. He needs a shorter title, clearly but his views on the path for UK base rates will be listened to with real interest.

Eurozone inflation and ECB meeting minutes awaited

It is going to be a very busy day for the euro. The European Central Bank will publish the minutes from its last monetary policy meeting. You’ll remember they raised their base rate to 4.25% on the 27th, the highest level we have seen since 2008. All we really want to know is whether that was the last of them or the beginning of the end for interest rate hikes. Perhaps the consumer price inflation data will also give clues as to whether the central bank for Europe has done enough. If the forecasters have got their numbers right, the answer to that question is no. The market consensus is that we will see an annualised inflation rate of 5.1%, down marginally from 5.3% in the July data. The ECB’s target is 2%. That doesn’t necessarily mean they will continue to lift interest rates until they’ve squeezed the pips out of consumers but the pace of interest rate hikes is likely to change as inflation starts to capitulate. GBP/EUR is up to €1.1650 this morning and the GBP/USD rate is pushing up to $1.09, largely due to a weaker USD.