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GBP Strength Limited as Yield Curve Aggressively Inverts

FOREX
  • GBP is stronger early Wednesday, with GBP/USD rallying to touch a react high of 1.2143 following the July CPI release which came in well ahead of expectations. Y/Y CPI surged to 10.1%, with core similarly rising ahead of forecast to again touch the highest levels since 1992. In response to the release, markets have brought forward their expectations for BoE policy in the coming quarters, and now see another 200bps of rate rises by the midpoint of 2023.
  • Somewhat countering this hawkish outturn, however, is the continued curve inversion for the front end of the yield curve, reinforcing expectations for a looming recession in the UK. The 2y5y yield spread is now the most inverted since the Global Financial Crisis, limiting GBP's strength ahead of the NY crossover. The short-term trend outlook is bullish but a break of 1.2293 is required to reinforce this and signal a resumption of the bull cycle. A break would open 1.2406, the Jun 16 high. On the downside, clearance of support at 1.2004 would instead expose 1.1890, the Jul 21 low.
  • NZD has entirely reversed initial strength garnered from the RBNZ rate decision overnight, at which the bank steepened their OCR track to bring forward the peak rate of 4% to Q2 next year. Initial NZD/USD strength (touching 0.6383) has unwound, putting the pair lower headed into NY hours.
  • Lastly, AUD is the poorest performing currency in G10 as wage price index data fell short of forecast. EUR/AUD is now north of 1.46 and narrowing in on the early August highs at 1.4806.
  • The US retail sales release takes focus going forward, with markets expecting the headline advance figure to have improved by 0.1% on the month. The FOMC minutes for their July meeting follow, due at 1900BST/1400ET. Central bank speakers today are limited to Fed's Bowman, who speaks on technology and women's role in the economy.

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