GBP/USD rebounds from a 2.5-year low hit yesterday as Liz Truss wins the leadership battle to become Prime Minister. Optimism surrounding a £130 billion energy support plan is lifting GBP.
· German factory orders fall by -1.1%, more than expected, the DAX holds steady
· RBA hikes interest rates by 50 basis points, AUD/USD remains under 0.68
· USD/JPY rises over 141.00 for the first time since August 1998 ahead of US ISM services PMI
News that Russia is halting gas flows indefinitely along the Nord Stream 1 pipeline hit sentiment hard yesterday. European gas prices jumped 15% yesterday, fueling inflation fears and worries of gas rationing. European markets closed lower, with the DAX leading the charge southwards, closing 2.2% lower. The FTSE fared better than its European peers, supported by heavyweight miners after stronger than expected Chinese services PMI data.
Liz Truss
Yesterday Liz Truss was announced as the new British Prime Minister. She inherits a dire economic situation of soaring energy prices, stalling growth, and 40-year high inflation. After travelling to see the Queen in Scotland, the immediate focus will be on her fiscal response; what she plans to do to support households and businesses through what is set to be a harsh winter.
GBP/USD fell to 1.1443 yesterday, ahead of the PM announcement, its lowest level since March 2020. The pound rebounded off this level and continues rising today, heading towards 1.16. Truss’ draft £130 billion energy programme and the promise of further plans within the week have injected some life into sterling.
German factory orders
Today European markets are holding steady, opening largely unchanged, although caution surrounding recession risks remains high. German factory orders fell more than expected 1.1% MoM in July, down from -0.4% in June. Expectations had been for a fall of -0.2%. The data comes following the German composite PMI yesterday, highlighting the extent of the economic downturn in the eurozone’s largest economy.
RBA
As expected, the RBA kicked off a big week for central bank action with a 50-basis point rate hike. This was the fourth straight supersized rate taking the OCR to 2.35%. With inflation still elevated at 6.1% for the second quarter, the RBA said that more rate hikes would be needed. The central bank is relying on strong consumer demand to help the economy absorb the rapid pace of hikes, even as the housing market slows. The 50-basis point move was priced in ahead of the meeting, so the AUD reaction has been minimal. AUD/USD trades just under 0.68, hovering around a 6-week low.
US ISM services PMI
The US markets reopen today after the long weekend. Futures are edging cautiously higher as investors look ahead to the ISM services PMI. Expectations are for growth to slow slightly in the dominant economic sector to 55.5 in August, down from 56.7. This is in divergence with the US S&P global services PMI which showed that the sector contracted sharply in August, falling to 44. Strong service sector growth could fuel USD strength and pressure US stocks.
USD/JPY has risen above 141.00 for the first time in 24 years as US treasury yields climb ahead of the services data. Softer data from Japan for household spending and labour cash earnings also helped lift the pair.
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