Sterling extends gains to two-week high amid bullish outlook
- Sterling about to mark weekly gains
- Data showcases flexibility of UK economy
- Odds of UK rate cut in September diminish
Sterling rose in European trade on Friday against a basket of major rivals, marking two-week highs and about to mark the best weekly profit in five days following a spate of positive UK data.
The data weakened the odds of a Bank of England rate cut in September, in turn boosting the currency.
The Price
The GBP/USD pair rose 0.25% today to $1.2889, the highest since July 25, with a session-low at $1.2852.
The pair rose 0.2% on Thursday, the sixth profit in seven days after UK growth data.
Weekly Trades
Across the week, the pound is up 1% against the US dollar, about to mark the first weekly profit in five weeks on hopes of closing the US-UK interest rate gap.
UK Growth
Official data showed total GDP grew by 0.6% in the second quarter, matching expectations.
The data shows that GDP growth remains at the upper limit of the pre-Covid 19 era.
Capital Economics’ analysts note that the data might give BOE officials some assurances that even as growth picks up, inflation continues to taper off.
UK Retail Sales
Earlier London data showed UK retail sales up 0.5% in July, matching estimates and proving the economy’s resilience.
UK Rates
Following the data, the market bets for a 0.25% September rate cut by the BOE fell to 40%.
US Rates
According to the Fedwatch tool, the odds of a 0.5% interest rate cut by the Federal Reserve in September stand at 22%, with the odds of a smaller 0.25% cut standing at 78%.
Rate Gap
The current UK-US interest rate gap stands at 50 basis points in favor of the US, and will likely shrink to 25 basis points in September.
Yen about to mark second weekly loss in row
- Unwinding of yen carry trades slow down due to interest rate gap
- Odds of a 0.5% US rate cut diminish
The yen rebounded in Asian trade on Friday against a basket of major rivals, in an attempt to recover from two-week lows against the dollar, however the currency was still heading for the second weekly loss in a row as the unwinding of yen carry trades slowed while US rate prospects changed.
Recent bearish remarks from Bank of Japan officials hurt the odds of a third Japanese rate cut this year, while strong US data hurt the odds of a 0.5% September rate cut by the Federal Reserve.
The Price
The USD/JPY fell 0.4% to 148.74, with a session-high at 149.34.
The yen closed down 1.3% on Thursday against the dollar, marking two-week lows at 149.49 back then after strong US data.
Weekly Trades
The yen is down 1.5% so far this week against the dollar, and about to mark the second weekly loss in a row.
Bearish Remarks
Bank of Japan Deputy Governor Shinichi Uchida said the central bank won’t raise interest rates when the markets are unstable.
He said that given the current turmoil, the BOJ will prefer to maintain current levels of monetary easing unchanged.
Japanese Rates
Naturally, following the remarks, the odds of a BOJ interest rate hike for the third time this year tumbled considerably, which would likely reduce the pressure to unwind carry trades.
US Rates
US retail sales rose past estimates in July in a sign of strong GDP performance in the second quarter of the year.
According to the Fedwatch tool, the odds of a 0.5% September interest rate cut fell from 38% to 22%.
Rate Gap
Investors have sold the yen mercilessly for months due to the massive interest rate gap between Japan and the US.
The rate gap created profitable opportunities, with traders borrowing cheap yen to invest in dollar assets with higher yields, the so-called Carry Trade.
However, after the BOJ and the Fed’s latest decisions in July, the rate gap between Japan and the US shrank to 525 basis points, the smallest such gap since July 2023.
And now investors expect the gap will shrink to 500 basis points by September as the Fed prepares a new rate cut.
Wall Street extends strong gains as recession worries fade
US stock indices rose on Thursday after earlier data assuaged concerns about a potential US recession.
Earlier government data showed US retail sales rose 1% in July on a monthly basis, passing estimates of a 0.3% increase.
US unemployment claims fell by 7 thousand to 227 thousand last week, a five-week low.
On trading, Dow Jones rose 1.1% as of 17:02 GMT, or 443 points to 40451 points, while S&P 500 rose 1.4%, or 74 points to 5529, as NASDAQ rallied 2.1%, or 358 points to 17,553.
Bitcoin under pressure as US yields rebound
- Strong US data confuses markets
- Odds of a 0.5% Fed rate cut in September diminish
Bitcoin lost ground on Thursday and moved into negative territory for the second straight day under pressure from the rebounding US treasury yields.
Strong US data sowed confusion in financial markets, as the odds of a 0.5% Fed rate cut in September receded.
Prices
Bitcoin fell 1.7% at Bitstamp today to $57,717, with a session-high at $59,366.
On Wednesday, bitcoin tumbled 3.2% at Bitstamp, marking the first loss in three sessions amid risk aversion.
Crypto Market Value
The market value of cryptocurrencies tumbled by over $40 billion to a total of $2.155 trillion as both bitcoin and ethereum sustained heavy losses.
US Yields
US 10-year treasury yields rose by 2.25% on Thursday, about to mark the first profit in five sessions, and hurting risk appetite in global markets.
The developments came after strong US data, especially retail sales and unemployment claims.
US retail sales rose past estimates in July, in another sign of strong GDP performance in the third quarter of the year, while unemployment claims fell for a second week.
According to the Fedwatch tool, the odds of a 0.5% rate cut by the Federal Reserve in September tumbled from 38% to 22%, while the odds of a 0.25% rate cut rose to 78%.