Daily Forex Market Report 23-Dec-2022: Sterling reacts to surprise inflation reads

EUR slows against the US Dollar

As it turns out, the US is still beating the UK in terms of gross domestic product.

Yesterday showed that UK GDP growth is slowing faster than expected, while across the Atlantic, the US economy grew 3.2% in the third quarter, better than the 2.9% forecast, thus rebounding from two straight quarters of contraction.

Consumer spending among Americans rose more than anticipated (2.3% versus 1.7% forecasted), as growth in healthcare and other services partially offset a decrease in spending on motor vehicles, food and beverages.

Cable responded by falling sharply from an intraday high of 1.214, hitting lows of 1.199 before entering a slight correction.

By the end of the day, the pound had lost around 0.3% to 1.203 but has inched higher to 1.204 in this morning’s Asia trading window.

GBP/USD reacts to US GDP growth – Source: capital.com

The euro continues to gain against the pound, with another quarter percent added yesterday and a handful of pips added this morning.

At 88.12p, the EUR/GBP pair is heading above November highs, with October highs in its sights next.

EUR/USD seems to be running of steam after six weeks of consistent gains. Currently changing hands at 1.061, the pair has been trading sideways for a good week now.

Inflation continues to rattle Japan, unsurprising given the bank’s general refusal to budge on its hand-off monetary policy.

In this morning’s reading, the annual inflation rate crept up to 3.8% from 3.7% a month earlier, the highest reading since January 1991, due to high prices of imported raw commodities and persistent yen weakness.

After falling sharply at the start of the week on news that the Bank of Japan may at least reconsider its yield curve policy, the USD/JPY regained its composure and currently stands at 132.28, with GBP/JPY changing hands at 159.68.

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Employment data also failed to impress, while the goods trade balance widened its deficit more than expected.

As such, Federal Reserve chair signalled a slower pace of interest rate hikes in the months to come.

"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” said Powell, though he did note that the terminal rate could be "somewhat higher" than the 4.6% indicated by in the September projections.

EUR/GBP closed the Wednesday session at .863, around 12 basis points below the intraday high, though the euro has the slight upper hand this morning having added a few pips.

Yesterday’s EU headline inflation data came in at a flat 10% against a 10.3% forecast, though that figure is still unacceptable high given the 2% target, so excessive rate hikes are likely to stay on the agenda in the coming months.

Combined with Powell’s dovish overtures, EUR/USD jumped a full percentage point to 1.042 yesterday, and continued to rally another 0.33% to 1.045 in today’s Asia window.

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