US is officially in recession

A second consecutive quarter of economic contraction is the definition of recession and the US reported that yesterday. US GDP dropped by 0.9% in the three months to June after a 1.3% contraction in the previous three months. The markets had expected 0.5% growth. The slump is entirely at odds with the Federal Reserve rapidly ramping up interest rates, so the Fed’s decision to cool expectations was quite timely. Unsurprisingly, the US dollar weakened, gold is set for its largest weekly gain since March, and US equities improved as well but that is also driven by some very healthy big tech results. The GBPUSD rate is back up above $1.22 for the first time in a month and the EURUSD rate is up a tad too but only as far as $1.0230. More of that is below. This afternoon brings US income and expenditure data and that ought to reinforce the worrying signs of a consumer-led decline. Further USD weakness may well follow, so beware.

Euro hit by Russian energy restrictions

Russia has turned off some of the taps supplying energy products to Germany. Many German cities are lowering energy consumption by turning off hot water in swimming pool showers, turning off non-essential traffic lights, and illuminating historic buildings at night. They are taking steps to try to ensure they have power for the winter months. The impact power shortages could have on German manufacturing is of obvious concern and the Euro has reacted negatively. The GBPEUR rate is up above €1.20 for the first time since April and further rises are likely, especially if this morning’s Eurozone GDP data is on the low side of forecasts. The headline forecast is 3.4% annual growth. So that’s the one to watch. We will also see Eurozone inflation for the consumer sector. Anything below an 8.6% annualised rate will give the Euro traders an excuse to sell the shared currency. The Euro has failed to capitalise against the US Dollar, as reported above.

Weakness of USD flatters Yen

The fall in the US Dollar’s value has given the Japanese Yen a bit of a fillip. In fact, this looks like it will be the best month the Yen has had in three years. The GBPJPY rate is a testament to that, down from Y165 at the start of the month to Y162 this morning. The more impressive move though is against the beleaguered USD. USDJPY is down from the high of July Y137.50 to this morning’s Y132.70. As mentioned above, we could see further USD weakness today, so the monthly gain could well be even more impressive. Part of the overnight Yen gains lies with an 8.9% monthly jump in Japanese industrial production and a 2.6% unemployment rate.

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