JPY Correction – Small, Medium Or Massive?

Pound Falls Against Euro and Dollar

Pound Sterling has retreated against the Euro and Dollar but extended gains against the Australian and New Zealand Dollars amidst deteriorating investor sentiment.

The Pound to Euro exchange rate eased back to €1.1890 amidst a stock market selloff that was centred on U.S. technology stocks, where earnings disappointed and let some air out of the AI market hype. The Pound to Dollar rate is now comfortably below $1.29 at $1.2884.

"Markets saw a massive slump yesterday, as the combination of weak earnings and poor data hit investor sentiment. That led to some very big losses, with the Magnificent 7 (-5.88%) posting its worst day since September 2022," says Henry Allen, a strategist at Deutsche Bank.

No Major Data

Euro Proving a Sideshow

Eurozone July PMI data was not particularly encouraging and showed manufacturing – particularly in Germany – dragging down composite PMI numbers. This will reinforce the European Central Bank's view that short-term economic risks lie to the downside. Expect more of the same today from the German Ifo reading, and also look out for ECB speakers Joachim Nagel at 1:00pm CET and Christine Lagarde at 5:00pm CET. It seems the direction of travel here is for two further ECB rate cuts in September and December.

In terms of rate differentials, we see scope for further narrowing in the EUR:USD two-year rate spread, which means EUR/USD could head back towards $1.0900 if the Fed easing narrative dominates today.

Data: ECB's President Lagarde speech 15:00PM

Risk Off Might Be Dollar Negative

The overriding FX story is one of the low-yield funding currencies outperforming – i.e., the Yen, the Chinese Renminbi and the Swiss Franc. The high yield and commodity currencies are underperforming;?this group is also hit by?the building view?that central banks (primarily the Federal Reserve) might be keeping rates too restrictive for too long.?

This brings us to today's US data. The focus will be on the second quarter GDP figure. This is expected to rise to 2.0% quarter-on-quarter?annualised from 1.4% in the first quarter. More interest might be had in the second quarter core PCE price data. From this investors will be able to calculate tomorrow's release of the June core PCE number. That number is widely expected at 0.2% month-on-month,?consistent with the Fed's 2% inflation target. Confirmation of such a number could see the short end of the US yield curve drop further as the market shifts to pricing in three rate cuts this year. Currently, the market fully prices a 25bp Fed cut in September and 63bp of cuts in total for this year.

Data: GDP Annualised 12:30PM