13/08 – Dollar weakness spares sterling’s blushes

GBP: Holding on to 1.30 but only due to a weak USD
EUR: Bid up on risk
USD: Inflation hurts US returns

Sterling

GBPUSD made a dash towards the 1.30 level in the hours after yesterday’s GDP announcement but was rescued by a weak dollar. A truer representation of sterling’s prospects could be seen against GBPEUR with the pair falling by 0.5% on the session.

Our wider fears over sterling moving forward are sometimes expressed in GBPUSD terms – it’s the currency of choice for most readers – but doesn’t preclude the fact that GBP is more likely to fall further against other currencies, given our core belief in a weak USD as well.

Sterling has not reacted to the Royal Institute of Chartered Surveyors latest house price balance release that showed 12% more surveyors are seeing house price rises than those who are seeing falls.

Euro

The single currency was the broad winner yesterday, pulling higher alongside risk assets. This morning’s French unemployment and German inflation figures were both roughly as expected and highlight the outperformance of European economies over others.

The European data calendar is quiet today and tomorrow and should trade on risk.

US Dollar

The dollar tripped lower yesterday following a slightly higher than expected inflation reading in the States. Typically, a higher inflation reading would feed into thoughts of possible interest rate rises and boost a currency accordingly. In the current world of extreme stimulus to support economies following the pandemic that logic is flipped on its head with higher inflation seen as a negative as it cuts the real return on US debt i.e. yields minus inflation and therefore investors push their money elsewhere.

To be fair, this phenomenon is not limited to the US dollar but there are central banks out there that have made noises suggesting they will hike interest rates sooner than the Federal Reserve and all communications from the Fed are pointing towards interest rates and additional QE to not be scaled back for at least two years.

The greenback is also not benefiting from the continual lack of progress on stimulus measures in Congress. President Trump released funds from a federal disaster fund last week for spending on wages, eviction relief and student loan provisions but that pot will be exhausted by mid-October.

Today is Thursday and therefore we are due the latest round of jobless claims numbers showing how many people have newly applied for unemployment insurance in the past 7 days. Consensus estimates are for 1.1m people, which despite being an astonishingly large number, would represent a pandemic low.

Elsewhere

Focus remains on the NZD with the Reserve Bank of New Zealand Chief Economist emphasising to the market that they want a weaker currency moving forward. Yuong Ha told reporters “We actually want to do more,” he said. “A combination of larger number, longer timeframe and a stepped-up weekly run rate is signalling our intent we want to drive interest rates lower.”

We remain confident in our positioning of NZD underperforming the AUD through the end of the year.

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.