A strong rise for the US dollar against a basket of major currencies, as it continues its gains for the third consecutive week, rising more than 1% over this week.
We witnessed a strong USD rise amid a state of anxiety prevailing in the global financial markets after credit rating agency Fitch downgraded the US credit rating from AAA to AA+.
Despite US Treasury Secretary Janet Yellen describing Fitch’s decision as “arbitrary” and JP Morgan’s CEO calling it “ridiculous,” the decision highlighted concerning points about the US economy, including rising government debt and economic growth slowdown.
As a result, stock markets declined, risk appetite diminished, and the US dollar gained strength as a safe-haven currency.
Financial markets are now awaiting various economic data from the United States today and tomorrow.
Additionally, markets are anticipating the decision of the Bank of England today regarding interest rates.
The performance of the financial markets
The euro continues its decline against the US dollar, affected by a strong rise of the US Dollar Index (DXY) The euro has recorded a decrease of more than 0.8% over this week, trading at around $0.9.
The British pound also declined amid anticipation of fresh interest rate hikes from the Bank of England today. The pound traded at around $1.26, after trading at $1.27 earlier today.
As for the Japanese yen, it managed to achieve some gains against the US dollar. Despite the strong rise of the USDagainst several currencies, the Japanese yen is also considered a safe-haven currency and has benefited from market anxiety. However, the yen remained within a weak trading range against the greenback, trading between 142 and 143 yen per US dollar.
Moving on to precious metals markets, we can observe that gold is trading below $1940 per ounce. The precious metal, in general, has been affected by the strong rise of the US Dollar Index (DXY) and traders’ preference for cash assets. Gold is trading down by more than 1.1% over this week, despite slight attempts to increase its value today.
As for silver, it has been trading at around $23 per ounce, experiencing weekly losses of over 3.4%. Silver prices have been significantly affected by the strong rise of the DXY as they are priced in dollars.
Additionally, there has been a significant increase in US bond yields, including the 10-year Treasury yield, which reached its highest level since November 2022 at around 4.14%. The 10-year yields have increased by more than 5% this week, benefiting from the bond market tension caused by the downgrade of the US credit rating.
Higher bond yields mean lower bond prices and are often associated with decreased demand for bonds.
Looking at the stock markets, we can see a decline in confidence and a downturn in most of the indices over this week.
BOE decision and the impact on GBP
The Bank of England will issue its decision today regarding interest rates, with the markets expecting a 25 basis points rate hike to 5.25%.
While Barclay’s analysts anticipate a 50-basis-points rate increase, several other banks, including Goldman Sachs, Deutsche Bank, and BNP Paribas, expect the increase to be limited to 25 basis points above the current level of 5.00%.
Regarding the British pound, we can observe that it is declining against the US dollar,as the latter is experiencing a strong rise due to demand for safe-haven currencies.
The decline in the British pound is also influenced by repricing based on the peak interest rates of this year at 5.75%. The financial markets previously believed that the Bank of England would continue to raise interest rates to 6.00% this year, but those expectations have since decreased.
In this context, and amid a strong rise in the US dollar, the movement of the pound today may be influenced by several factors, including US economic data.
As for the impact of the Bank of England’s decision, it may be linked to the interest rate statement and the voting on the decision.
Since December 2022, two members voted to keep the interest rate unchanged, while seven members voted to raise it.
Today, if the number of members demanding to keep the interest rate unchanged increases, we may see the pound slipping against other currencies.
However, if the number of members demanding a rate hike increases, the pound may strengthen.
A surprise in the Bank of England’s decision, such as a 50 basis points rate hike, could have a positive impact on the pound against currencies.
On the other hand, a surprise in not raising the interest rate could cause a significant decline in the pound against currencies.
But if the interest rate is raised by 25 basis points, and only two members vote to keep it unchanged while seven vote to raise it, the impact will be linked to the interest rate statement.
If the statement indicates a determination to continue raising the interest rate and expectations point to it reaching 6.0% later this year, the British pound may rise against a basket of major currencies.
However, if market participants notice a less aggressive tone in the statement, it could put pressure on the pound.
Half an hour after the decision, Bank of England Governor, Andrew Bailey, will give a press conference.
If his statements are overly hawkish, it could support the pound, while less hawkish statements may lead to a decline in the pound.
Note: The movement of the pound may be influenced by various factors, and the expectations mentioned may overlook other economic and fundamental variables.
US economic data
Today’s economic data begins with the Challenger job cuts report, with the previous reading at 25.2%.
We are also looking forward to the release of the weekly US jobless claims data, with expectations of a decline to 226,000 claims.
The latest data showed 221,000 people filed for claims, and today’s expectations imply some stability in the claims.
Following that, the ISM Non-Manufacturing Purchasing Managers’ Index (PMI) will be released, with expectations of showing a slight slowdown in growth.
The index is likely to decrease from 53.9 to 53.1 points.
Afterwards, the Factory Orders data will be released, expected to show a growth of 2.0% in orders.
This combination of economic data may have a tangible impact on the financial markets in general, and specifically on currency pairs tied to the US dollar, as well as on gold, silver, and US stock market indices.