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Dollar weakens as inflation eases

Thanim Islam
Thanim Islam 11 August 2022

GBP: Sterling rises in line with risk appetite

EUR: EURUSD now at one-month high

USD: Inflation eases but Fed still worried by high inflation

Sterling

As US inflation fell more than expected, markets were quick to support risk currencies like the pound, with the currency attempting to make a new high for the month versus the dollar.

Today, chancellor Nadihm Zahawi will be holding crunch talks with energy bosses over winter price hikes, with the aim of delivering the equivalent of a £400 energy bill discount to households.

Data this morning has showed that tUK house price balance declined to 63% in July from 65% in June, reflecting the UK's worsening outlook, and rises in interest rates.

On a side note, thoughts now in the markets are alluding to the idea that Liz Truss’s plans to change the mandate for the Bank of England could be see as a threat to the pound. So, should she win the leadership contest, markets will be tussling with the idea that her plans to cut taxes should give the Bank of England freedom to hike interest rates, and thus boost the pound versus changing the BoE mandate, creating uncertainty and negatively affecting the pound.

No data out today with focus on tomorrow's first estimate of second quarter growth. Markets are already pricing in that the economy shrank by 0.2%.

Euro

Similar to the sterling yesterday, the euro gained versus the US dollar on the back of the lower-than-expected inflation figures from the US.

This contrasts with the inflation data from Germany and Italy which remained at 8.5% and 7.9% respectively, keeping rate hike expectations for the eurozone the same, and thus narrowing the interest rate differential between the eurozone and the UK.

As it stands, the euro is at a one-month high versus the US dollar.

USD

Inflation eased more than expected in July down to 8.5%, with core inflation remaining at 5.9%. Unsurprisingly, headline inflation was dragged down by falling energy prices as commodity prices fell from their peak in June. The dollar weakened as a result, as markets pared back interest rate hike expectations, now suggesting that we are more likely to see a 0.5% rate hike in September as we saw 0.75% pencilled following last week's job data.

However, the weakness of the dollar did not continue overnight. Fed member Evans stated that despite the fall, inflation remains far too high, and fellow member Kashkari commented that interest rates should be at 3.9% by the end of the year, and marginally higher at the end of 2023 to 4.4%.

Markets eased the year-end rate to 3.5%, forecasting that they will peak around March before dropping.

For now, the fall in inflation doesn’t necessarily mean that we could see a continuation of the dollar's weakness. Fed speakers look set to keep up with their hawkish rhetoric, being concerned that core inflation perhaps isn’t falling. We see the current US dollar's weakness as short-term, with no change in the bigger picture for the US dollar.

Market rates

Today's Interbank Rates at 09:20am against sterling movement yesterday.

Euro

€1.184 ↑

US dollar

$1.223 ↑

Australian dollar

$1.723

South African rand

R19.85

Japanese yen

¥162.1

Have a great day.