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German inflation in focus ahead of US Q1 GDP

Having stopped the rot on Tuesday, ending a six-day losing streak, European markets had another positive session yesterday, although gains were tempered by remarks from US Federal Reserve chairman Jay Powell, who warned that several more rate hikes could be coming in the next few months, in comments made in an ECB panel discussion in Sintra, Portugal. 

US markets finished the day mixed with little in the way of direction, as investors digested the various remarks from central bankers, who all peddled a similar narrative of further rate rises to come. The subdued finish in the US is likely to translate into a flat European open.

The Japanese yen continued to decline, already at record lows on a trade-weighted basis, as Bank of Japan governor Kazuo Ueda gave little indication that officials were any close to stemming the recent losses. 

There is the hope that upcoming data could prompt a softening of this hawkish message, starting today with the latest June inflation numbers from Germany. We’ve seen a sharp deceleration in the last few months, falling from 7.6% in April to 6.3% in May. Today’s June numbers could see a modest increase to 6.8%, which will do little to assuage ECB concerns that inflation is falling back sharply. 

In the UK, the sharp rise in gilt yields in the wake of surging inflation is prompting concerns about the housing market, and more specifically the ability of consumers to pay their existing mortgage or take out new ones. Since the start of the year, we’ve seen a modest improvement in mortgage approvals, after they hit a low of 39,000 back in January. The slowdown towards the end of last year was due to the sharp rise in interest rates which weighed on demand for property, as well as weighing on house prices. 

As energy prices have come down, along with lower rates at the start of the year, demand for mortgages picked up again, with March approvals rising to 51,000, before slipping back to 48,000 in April. This could well be as good as it gets for a while, with the renewed increase in gilt yields we’ve seen in the past few weeks prompting weaker demand for new borrowing. Similarly net consumer credit has also started to improve after similar weakness. 

Although inflationary pressures are starting to subside, the increase in wages is unlikely to offset concern over higher rates and higher mortgage costs in the coming months. Given current levels of uncertainty, consumer credit numbers could well increase further, while net lending could see a further decline after April lending fell by -£1.4bn, the weakest number since July 2021. 

We also have the final iteration of US Q1 GDP, which was revised up to 1.3% from 1.1% a few weeks ago. The main drag was down to a bigger than expected scaling down in inventories, as well as an upward revision to personal consumption to 3.8%, which was a significant improvement from 1% in Q4, as US consumers went out on a new year splurge.

Slightly more concerning was rise in core PCE over the quarter, from 4.4% in Q4 to 5%. We’re not expecting to see much of a change in today’s revisions, although headline might get revised to 1.4%, while most of the attention will be on the core PCE number for evidence of any downward revisions, as more data gets added to the wider numbers.

Weekly jobless claims are expected to come in unchanged at 264,000.

EUR/USD – holding above the 50-day SMA and support at the 1.0870/80 area, but unable to move through the 1.1000 level. The main resistance remains at the April highs at 1.1095. Below 1.0850 signals a move towards 1.0780.

GBP/USD – slid back sharply below the 1.2670 area, now opens a move towards the 50-day SMA at 1.2540. As long as this holds, we remain on course for a move towards the 1.3000 area. 

EUR/GBP – broken above 0.8630, heading towards the 50-day SMA at 0.8673, which is the next resistance area. Support comes in at the 0.8580 area.

USD/JPY – continues to edge higher towards the 145.00 area. We have support at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30. 

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