Sunset Market Commentary: #Pound Soars as US Dollar Retreats#AUD Soars as China’s Inflation Drops (9 SEPTEMBER 2022)
Pound Soars as US Dollar Retreats
GBP/USD has recorded sharp gains today. In the European session, GBP/USD is trading at 1.1608, up 0.92% on the day. Still, the pound remains vulnerable – on Wednesday, it fell to 1.1407, its lowest level since 1985. Looking ahead to next week, there is a data dump on Monday, with GDP and Manufacturing Production the key events.
It’s a very light calendar today, with no UK data and only one minor US event. Even so, the British pound has jumped on the bandwagon as the US dollar is broadly lower. The US dollar has taken a break after some impressive gains, as the pound has fallen some 500 points in just three weeks. With the US economy in good shape while the UK struggles, GBP/USD could resume its downtrend shortly.
In the UK, PMIs have been pointing to weak conditions across the economy. The August manufacturing and construction PMIs pointed to contraction, with readings below the neutral 50.0 line. The Services PMI managed to remain in expansion territory, but just barely, at 50.9. Inflation remains red hot, hitting 10.1% in July, which has caused a severe cost-of-living crisis.
Incoming Prime Minister Truss has pledged to cap energy bills, at a cost of some 132 billion pounds, which will provide households with some badly-needed relief. Truss inherits a struggling economy and her initial policy moves will be closely watched. Deutsche Bank has warned that an “unfunded and untargeted fiscal expansion” by the new government could raise inflation expectations and lead to a “sterling crisis”.
What’s next for the Federal Reserve? The next meeting is on September 21st, with the Fed looking to raise rates by either 50 or 75 basis points. Next week’s inflation report could be a major factor in the Fed’s decision. Fed Chair Powell and other members have stated that curbing inflation is “priority number one”, and if inflation falls, it will raise speculation that the Fed plans to ease up, which would weigh on the US dollar. In July, inflation unexpectedly fell, and market exuberance about a change in Fed policy sent the US dollar sharply lower, despite the Fed saying its stance had not changed.
GBP/USD Technical
- 1.1589 has switched to support. Below, there is support at 1.1417
- There is resistance at 1.1682 and 1.1839
AUD Soars as China’s Inflation Drops
The Australian dollar has posted sharp gains today. In the European session, AUD/USD is trading at 0.6837, up 1.27%.
China inflation falls unexpectedly
China’s economy has been stalling, as global demand has weakened and China rigorously enforces a zero-Covid policy. The slowdown in the Chinese economy has hurt global growth, but the silver lining is that August inflation also dropped, which has taken the edge off global inflation. China is a key driver of external inflation pressures, and the decline will be welcome news in the major economies, where inflation remains enemy number one and has led to a sharp tightening in policy.
China released the August inflation earlier today. On an annualized basis, August CPI was up 2.5%, lower than the 2.7% gain in July and below the consensus of 2.8%. The Producer Price Index for August slowed to 2.3%, down from 4.2% and below the estimate of 3.1%. The drop in CPI in the world’s number two economy has raised risk sentiment and sent risk-related currencies like the Aussie sharply higher today.
The RBA raised rates by 0.50% earlier this week, bringing the cash rate to 2.35%. RBA Governor Lowe said on Thursday that the RBA would need to raise interest rates at least twice more to contain the “scourge” of inflation. Lowe reiterated that the pace and extent of future rate hikes would be data-dependent, especially inflation and wage growth. After four straight hikes of 0.50%, the RBA may decide to ease up in October with a small hike of 0.25%. Next week’s employment report will be an important factor in the RBA’s rate decision.
AUD/USD Technical
- AUD/USD is testing support at 0.6737. Below, there is support at 0.6661
- There is resistance at 0.6737 and 0.6846
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