19/08 – Dollar falls to a 2 year low

GBP: Close to the highest of the year vs USD

EUR: Can we hit 1.20 today?

USD: Sick as a dog

Sterling

GBPUSD is within 0.25% of its highest level on the year as we open up this morning, driven higher more by a weak USD than anything although wider sterling demand increased following this morning’s inflation number.

Inflation is showing signs of a v-shaped recovery – not what consumers need at all – following an increase to 1% in July compared to this time last year. The rise was underpinned by increases in clothing prices as well as furniture and transport costs with gains also seen in culture and recreation and health. Consumers evidently had a pent up demand for summer clothes, haircuts and road trips to the beach.

While an inflation rate of 1% is still well below the Bank of England’s targeted figure of 2%, a period of rising inflation alongside the other well-known issues that the UK economy has to navigate in the coming months – an end to the furlough scheme and a decision one way or the other on Brexit – would make things even more painful for those whose incomes have been hit by the pandemic.

A CPI reading of 1% is unlikely to see the Bank of England change its stance on policy anytime soon but may lead to disagreements in the future as to how much more stimulus the economy can take.

Euro

With GBPUSD having taken out its near-term target of 1.32, it only seems right that EURUSD should have a crack at 1.20 and we envision that it will in the coming sessions. The last time it attempted this move was back in 2017 when it broke through before failing at 1.2070. That spike was led by EUR strength not dollar weakness as it is today and so while we think EURUSD above 1.20 is too rich a price currently, the dollar could continue to drag it higher.

US Dollar

The US dollar fell to a 2 year low in trade weighted terms yesterday, the only surprising thing being that there was hardly a new catalyst to give it the push that it needed.

It is not intellectually difficult to get behind the idea that the dollar should be weakening given the impact of the virus, growth differentials and the enormity of the Federal Reserve’s bond buying program as well as an upcoming election. With this in mind, markets are piling into what has rapidly become as close to a certainty as possible, shorting the USD.

The chances of a snapback are high, especially we feel against the pound given the double whammy of furlough scheme closures and the culmination of Brexit negotiations.

The dollar may be in for a tough evening as well should tonight’s minutes from the latest Federal Reserve meeting during which the central bank may have set up its ongoing policy of forward guidance on how low interest rates will remain and for how long. We also think that members of the Federal Reserve may also have discussed the path forward for asset purchases although a tapering of plans is unlikely to receive a solid date until the end of the year.

Elsewhere

Despite a growing number of banks signalling that they believe the Reserve Bank of New Zealand will cut interest rates into negative territory next quarter, the NZD has managed to remain stable in the past 24hrs. AUDNZD is down around a per cent since yesterday morning.

Have a great day.

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Jeremy Thomson-Cook

Jeremy Thomson-Cook

Jeremy has over 13 years experience working in the FX industry. As a specialist in political risk mitigation and currency hedging, he regularly advises clients on the day-to-day moves of the markets and the implications of fiscal and monetary policy on international businesses.