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USD pummelled as optimism rises

There is a technical term for what happened to the US dollar yesterday and that word is ‘mullered’. The American currency lost ground right across the board and, thus far, that has been the story of the week. That fall was driven by a reduction in safe-haven buying of the USD as news emerges that China may be softening its stance on lockdowns and the data from the eurozone Purchasing Manager’s Indices was marginally less pessimistic. By way of contrast, the US manufacturing sector PMI was worse than forecast – into negative territory in fact. Notwithstanding some improved data, global leaders and bankers are still talking about recession, so a resumption of US dollar buying is always waiting in the wings. For now, though, at an interbank level, GBP sellers can buy USD at a rate of $1.2245 and euro sellers can buy at $1.0530. These are levels we haven’t seen since June. The next test for the USD is this afternoon’s US employment report. No one appears to be expecting a change in the 3.7% unemployment rate but a slowdown in job creation is expected. So, cautious traders might take profit on yesterday’s GBPUSD and EURUSD rallies, pulling these rates a little lower.

GBPEUR tests €1.17

During the US dollar sell-off yesterday, the GBPEUR rate spiked to test but not break €1.17. It has slipped back to €1.1620 this morning after a bout of profit-taking and ahead of a speech by ECB President Christine Lagarde. Mrs Lagarde said yesterday that monetary policy is complicated by uncertainties. Maybe someone needs to remind her that the same applies to living and/or running a business when costs are rocketing up and central banks just make the cost greater. But I digress. She committed to getting inflation back to target and that is likely to involve higher interest rates. There isn’t a lot of UK data next week but Eurozone GDP data will be released, as will retail sales figures.

AUD slumps on poor data

What usually happens when the US dollar weakens is that currencies like the Australian dollar and the New Zealand dollar gain some buyers. That didn’t happen yesterday. In fact, the Aussie dollar dropped three cents against the pound after the AIG manufacturing index fell from 49.6 to just 44.7. That level of pessimism hasn’t been seen since May 2020 and flies in the face of the Reserve Bank of New Zealand’s optimism. So the GBPAUD rate starts the day just below AUD 1.80, having poked its head above that level briefly yesterday. That is quite a swing from Thursday’s low of AUD 1.7715. Next week brings an interest rate decision from the Reserve Bank of Australia plus Q3 Aussie GDP data, which may be disappointing. So look out for more volatility in this pair.

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