28/08 – Dollar slips to 2 year low

28/08 – Dollar slips to 2 year low

GBP: Highest levels of the year against the USD

EUR: Can’t beat back stronger sterling

USD: Fed unveils new plans for inflation


Sterling ran to its highest level this year against the USD during yesterday’s speech from Fed Chair Jerome Powell and despite falling back briefly, overnight it has recovered well. Bank of England Governor Bailey’s speech at 2pm this afternoon is the likely trigger for the current pick up in sterling with investors betting that the messaging from the Bank of England will be seen as more hawkish relative to the Fed’s plans to keep rates as low as they want for as long as they want.

For those looking for a drive higher in GBP, today could easily present that opportunity but we have real doubts as to the ability for sterling to spend longer than a few weeks around here unless we see a substantial change in market sentiment, an extension of the furlough scheme or a positive outcome from Brexit talks.


The euro is making gains against the USD and JPY this morning as investors react to the most recent change in Fed policy and the subsequent move into riskier assets. The European data calendar is quite busy this morning with a French GDP, inflation and consumer spending releases. Spanish retail sales, consumer/manufacturing confidence from Italy and euro-area economic confidence are also set for release although we expect that the euro will largely follow the market trend of higher risk assets and push onwards against the USD.

US Dollar

Inflation policy is shifting markedly in the United States. Now, that may not be the most thrilling of sentences that you’ve ever read but the impact on the US dollar is and will be profound moving forward.

The Federal Reserve will now allow inflation to exceed its 2 per cent target for periods of time in order to make up for low inflation. The central bank also acknowledged that this will lead to a reimaging of the relationship between rising employment and higher wages and therefore costs.

The issue within this is that the changes are entirely subjective and the Federal Reserve has decided to not constrain itself with a time measure; they can keep rates as low as they want for as long as they want and say that is purely making up for lost time. The issue will come during a sustained period of higher inflation and/or a very strong jobs market but that is not an immediate concern.

The longer term issue for the USD is that the currency has lost some of its first mover advantage; coming out of a recession, the world tends to take its cues from the Federal Reserve and hence we have doubts as to the longer-term strength of the USD.

Caveats remain however, we are entering a new round of currency wars with the Fed prepared to keep the USD weak and the ball is now in the court of those other central banks who will depend on keeping their own currency weak against the greenback.

Get ready for USD volatility.


Japanese PM Shinzo Abe has resigned this morning blaming poor health for his decision. Abe will leave office as Japan’s longest serving Prime Minister and the news did immediately cause a dip in local equities and a stronger yen. We think that the impact on Japanese assets will be relatively benign in the short term as long as Bank of Japan Governor Kuroda remains in post.

Have a great day and a better weekend.

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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.