Home Daily Commentaries USD weakens ahead of inflation data

USD weakens ahead of inflation data

Daily Currency Update

UK Prime Minister, Liz Truss, remained firm in her first Prime Minister Questions (PMQs) in parliament yesterday. Truss insisted that she would not reverse her leadership pledge or cut public spending despite the disastrous market reaction to the mini-budget that was unveiled by new Chancellor, Kwasi Kwarteng, on Friday 23rd September.

Labour leader, Sir Keir Starmer, accused the Prime Minister of fantasy economics during the PMQs and said that cuts would be needed to fund the £45b of tax cuts that were announced by Kwarteng.

The main issue is that UK gilts have fallen in value, forcing the Bank of England (BoE) to intervene to protect a ‘fire sale’ which would hit pension funds hard. 30 year gilt yields have risen to around 5%, when on 1st September they were around 3%, highlighting the market’s concern over the government’s handling of the economy. The higher the yield on a bond the riskier it is seen.

Despite this news, Sterling has appreciated against the EUR and USD with many believing that BoE Governor Andrew Bailey’s pledge to stop its bond-buying intervention will not be seen until the fiscal review that has been brought forward to the end of October. GBP/USD has jumped back above 1.1100, partly helped by improving risk appetite. USD is normally bought as a safe haven currency at times of market uncertainty. GBP/EUR is making a push for 1.1450.

Key Movers

The US held the macroeconomic headlines yesterday after releasing its PPI and FOMC meeting minutes. The yearly rate of the Producer Price Index fell from 8.7% to 8.5% and the core reading fell from 7.3% to 7.2% when a hold was expected.

The FOMC meeting minutes helped reaffirm the need for a more restrictive policy stance to promote employment and price stability. The federal fund rate will likely need to be raised further in the path to tackle inflation that is showing little sign of abating.

After the releases, market participant haven’t changed their predictions for the next rate decision which is currently believed to be a 75 basis point raise on November 2nd. USD is weaker on the news as we head into today with eyes now firmly on the latest inflation number from the US this afternoon – CPI m/m and y/y at 1:30pm. EUR/USD has jumped to around 0.9730 this morning and GBP/USD peers over 1.1140.

Expected Ranges

  • GBP/USD: 1.1040 - 1.1220 ▲
  • GBP/EUR: 1.1320 - 1.1560 ▲
  • GBP/AUD: 1.7630 - 1.7790 ▲
  • EUR/USD: 0.9690 - 0.9820 ▲