UK Economy Bounces Back: GDP Growth Gives Pound a Boost
The euro maintained over $1.10, close to its seven-month high the day before, supported by data suggesting decreasing U.S. inflation, which bolstered predictions of a Fed rate drop next month. The pound gained ground on Thursday following strong British GDP statistics.
Although data revealed that Britain’s economy expanded by 0.6% in the second quarter of 2024, in line with economists’ estimates and built on a strong 0.7% growth in the first quarter of the year, markets were calmer following recent turmoil. The pound was up 0.2% vs the dollar at $1.2856.
In relation to the euro, which fell 0.2% to 85.66 pence, the pound also gained strength.
As markets attempted to process the U.S. inflation data, the European Common Currency remained stable against the dollar at $1.10090, rising to $1.10475, its highest level of the year, on Wednesday.
According to them, the consumer price index increased somewhat as predicted, and the annual rate of inflation decreased to less than 3% for the first time since early 2021.
Together with the modest increase in producer prices in July, the data point to a decreasing trend in inflation, albeit traders now expect the Fed to be less active in cutting rates than they had hoped.
Next up is the U.S. retail sales data, which is expected at 12:30 GMT on Thursday.
Head of FX strategy at Rabobank Jane Foley stated, “Monetary easing is certainly getting closer, but the market is framing that in the context of what we saw at the beginning of last week when there was a huge move in expectations for the Fed.”
“Rather than perhaps being excited at the prospect of a move some are disappointed that we might not get a 50 basis point cut.”
According to the CME FedWatch tool, markets are currently pricing in a 64% possibility of a 25 bps drop and a 36% chance of a 50 bps reduction for next month. After the sell-off last week, traders were evenly split between the two cut options at the beginning of the week.
“As the market tries to clarify the extent of the Fed’s rate cuts in the remainder of the year, retail sales will be pulled apart, and we also have Walmart (NYSE:WMT) earnings which will add some flavour to the economic data,” said Foley.
The report revealed that Japan’s economy expanded by a faster-than-expected annualized 3.1% in the second quarter thanks to a strong uptick in spending, which kept another near-term rate hike on the table. The yen remained stable at 147.21 per dollar.
The yen is still far above the 38-year bottom of 161.96 it was stuck to at the beginning of July, even though it has crept away from the seven-month high of 141.675 per dollar achieved amid last week’s market chaos.
Investors who backed out of popular carry trades were caught off guard by Tokyo’s bursts of intervention early last month and the Bank of Japan’s surprise rate hike at the end of July, which caused the yen to surge.
The Norwegian crown remained mostly unaffected by the central bank’s decision to retain interest rates, which were 10.695 per dollar and 11.783 per euro.
The report revealed that Australian employment accelerated past estimates in July, even as the unemployment rate increased slightly to a 2-1/2 year high. As a result, the Australian dollar was up 0.36% at $0.6620. [AUD]
The Reserve Bank of Australia’s (RBA) claim that a rate decrease this year is improbable given how sticky inflation is turning out could be strengthened by the strength of labor demand.
In other news, the disappointing statistics showing China’s manufacturing output growth slowed and fell short of expectations in July caused the country’s yuan to fall versus the dollar.
