GBP/USD holds above 1.20 ahead of tomorrows Fed interest rate decision

Key Movers

Yesterday saw a dire German IFO Business Climate survey release for June which came in at 88.6, its worst reading since June 2020 when the world was still recovering from the worst of the COVID-19 pandemic. The three main sectors surveyed, manufacturing, services and trade all showed that pessimism had grown in the current situation as well as the outlook for the future as they battle with rising costs and huge uncertainty over energy supplies from Russia. Despite this gloomy outlook from the eurozone's largest economy, EUR/USD has held above 1.02 as concerns grow over the health of the US economy. Friday saw an awful Services PMI release from the States and there is a possibility that we could see the US enter a technical recession (two consecutive quarters of negative growth) on Thursday when second quarter GDP numbers are released. An annualised rate of growth of 0.4% is expected (which equates to a 0.1% quarterly uptick) so should this come in negative then the Federal Reserve would be tightening its monetary policy in the face of a contracting economy, a far from the ideal situation even if the concerns over energy supply are nowhere near as worrying as those being experienced by many European countries. Ahead of the GDP data, we have tomorrow night's interest rate decision from the Federal Reserve. A 75 bp hike is the baseline prediction by most and is priced into the dollar however the messaging over the health of the US economy will be of keen interest to the markets as if the US economy does slow significantly then a fall in consumer demand should help naturally quell inflationary pressures which could lead the Fed to not raise rates as high this year as previously expected. EUR/USD is currently around 1.0215.