GBP Falters, USD Steadies, and EUR Struggles.

• GBP Weakness: The Pound Sterling (GBP) fell to 1.2880 against the US Dollar (USD) due to negative market sentiment ahead of the US Q2 GDP data release.
• USD Performance: The Dollar Index (DXY) slightly decreased by -0.06%, affected by weak US manufacturing PMI and new home sales, but partially recovered due to rising T-note yields.
• US Economic Indicators: US Q2 GDP growth is projected at 2%, driven by strong consumer spending, with expectations of a slowing GDP Price Index to 2.6%, potentially supporting Fed rate cuts.
• PCE Data Focus: Markets are looking towards Friday’s PCE data for further insights on inflation, with the core PCE inflation expected to ease to 2.5%, reinforcing the possibility of Fed rate cuts.
• EUR Struggles: The euro declined due to weak eurozone economic performance and widening yield gap between US Treasury bonds and regional bonds, despite temporary improvements in German consumer sentiment.

GBP: The Pound Sterling (GBP) slipped to 1.2880 against the US Dollar (USD) during Thursday’s London session. The decline in the GBP/USD pair is attributed to negative market sentiment ahead of the release of advanced US Q2 Gross Domestic Product (GDP) data, scheduled for 12:30 GMT. While S&P 500 futures made some gains during European trading hours, this is seen as a minor recovery following a significant 2.31% drop on Wednesday. The US Dollar Index (DXY), which measures the Greenback’s value against six major currencies, hovered around a sluggish 104.30. The US Q2 GDP is projected to have grown by 2% annually, up from the previous 1.4%, driven by robust consumer spending. Consensus indicates that the advanced GDP Price Index likely slowed to 2.6% from 3.1%, a development that would be welcome by Federal Reserve (Fed) policymakers and could solidify expectations for interest rate cuts in September. Looking ahead, the key event for the US Dollar will be the Personal Consumption Expenditures Price Index (PCE) data for June, set to be released on Friday. The core PCE inflation, the Fed’s preferred inflation measure, is expected to have eased to 2.5% from May’s 2.6%, with a steady monthly increase of 0.1%.

USD: On Wednesday, the Dollar Index (DXY00) dipped slightly by -0.06%. The primary downward pressure came from weak US manufacturing PMI and new home sales reports. However, the dollar managed to recover some losses as the T-note yield rose during the day. The 10-year T-note yield finished up +2.2 basis points at 4.272%. The preliminary July S&P US manufacturing PMI fell by -2.1 points to 49.5, significantly below the expected 51.6, marking its first drop below the 50.0 expansion-contraction threshold since December 2023. Conversely, the preliminary July S&P US services PMI increased by +0.7 points to 56.0, surpassing expectations of a decline to 54.9. June US new home sales decreased by -0.6% to 617,000, contrary to expectations of an increase to 640,000, as high mortgage rates and home prices continued to weigh on sales. Markets are now focused on Friday’s PCE deflator report, which could provide further insight into whether inflation has decreased enough for the Fed to consider a rate cut. Consensus forecasts suggest the June PCE deflator will ease to +2.4% year-on-year from May’s +2.6%, and the core PCE deflator will also ease to +2.5% year-on-year from May’s +2.6%. These expected figures would represent new three-and-a-quarter-year lows for both measures, boosting the Fed’s confidence in inflation continuing its downward trend towards the 2% target.

EUR: The euro continues to weaken due to the underperformance of private sector activities in the eurozone and the widening yield gap between treasury bonds and regional bonds, now at its highest in twenty days. This trend persists despite a temporary rebound in German consumer sentiment. Recent S&P Global reports on service and manufacturing PMIs for Germany, France, and the eurozone confirmed ongoing weak performance, particularly in the largest economies. Additionally, the GfK Consumer Climate Index indicated a sharper-than-expected decline in German consumer pessimism. This weak economic activity led to lower bond yields in the region, further widening the yield gap between US Treasury bonds and regional bonds. The spread between 10-year US Treasury bond yields and their German counterparts reached 1.822%, the highest since July 3. Continued economic weakness in the region is likely to further widen this yield gap in favor of US Treasuries, posing a significant negative factor for the euro in the short term. Despite near-certainty about potential Federal Reserve interest rate cuts in September and possibly again in November or December, the euro has been unable to benefit due to ongoing disappointing economic performance and the high yield gap.