EM Market report

Will the dollar make new highs?

Thanim Islam
Thanim Islam 22 August 2022

GBP: Fears of recession and rising cost of living drive GBP lower

EUR: Another test of parity?

USD: Dollar on the march to eke out new highs

Sterling 

Sterling dropped to a one-month low versus the US dollar as the greenback continued to retrace the losses it suffered since July.

Overall, appetite for the pound has been somewhat subdued as fear of an impending recession continues to drive sterling markets. Interest rate markets suggesting that UK rates will be higher than the US have failed to give support for the British pound.

This week the major data point will be on Tuesday, where we have the August PMIs for the manufacturing and service sector. Given the way markets are now viewing sterling, a positive print here seems unlikely to give the pound a positive direction in the short term, but should the data suggest both sectors have slowed down further, we can expect the sterling to weaken further.

Euro 

Whilst the euro continues to do well versus the pound, now at its strongest level against the pound for a month, it continues to suffer against the juggernaut that is the dollar.

High gas prices continue to subdue demand for the euro despite ECB members suggesting that interest rates need to be higher. The problem with the euro is it is well behind in terms of hiking interest rates, and versus the dollar it only seems inevitable that we will see the EURUSD rate breach parity again, should Fed Powell suggest that the Fed is nowhere near slowing down interest rate hikes.

Focus this week will fall on Tuesday with manufacturing and services PMIs, as well as second quarter growth figures from Germany on Thursday.

USD

The dollar seems to be set up to continue its rally from August lows. Markets seem to be reassessing their thoughts on the Fed slowing down tightening of monetary policy, after several Fed members over the last 10 days continued to suggest that the Fed is far from done in battling inflation, and that interest rates will need to stay higher for longer.

The Jackson Symposium will be the highlight for the week, with Fed Powell set to deliver the keynote speech. If there is any news to suggest that the Fed remains on it's path to fight inflation, and to continue to keep hiking rates, this will only boost the US dollar, and with that, demand for risk based assets will likely be dampened. So we could well see the pound, euro, and commodity based currencies like the Australian and New Zealand dollar weaken.

On the data front, second estimates for economic growth for the second quarter are due out on Thursday, and the Fed's preferred measure of inflation, the core PCE index, is out on Friday. Should both come in higher, then expect the inevitable… new lows for the GBPUSD and EURUSD pairs.

Chart of the day 

From a technical analysis perspective, the dollar index has now retraced over 75% of its falls since July 14th, suggesting that dollar long investors have now taken the lead once again.

The dollar is back in focus for markets this week with the Jackson Symposium, GDP, and core PCE data due out. Based on the current trend, and should data not disappoint, it would be very hard to rule out the dollar making new highs by the end of this week.

chart of the day 22/8

Source: Bloomberg Finance L.P. 

Market rates 

Today's Interbank Rates at 09:49am against sterling movement last Friday.

Euro      €1.178 ↓
US dollar $1.180 ↓
Australian dollar $1.710 ↓
South African rand R20.14 ↑
Japanese yen  ¥161.6 ↓

Have a great day.