Dollar
There was a risk-on tone to start the week yesterday, which has resulted in the dollar softening slightly overnight. This in turn is reflected in GBP/USD opening at the $1.38 threshold and EUR/USD having pushed above the $1.18 level. The greenback came under some modest selling pressure following Fed Chair Powell’s speech last Friday afternoon as he re-emphasised the central bank’s commitment to its average inflation targeting regime, highlighting the importance of achieving maximum employment (measured by the labour participation rate AND the unemployment rate) before interest rate hikes will be considered. While the Fed may taper its asset purchases before year-end if growth holds up, Powell again signalled that there is no mechanical link between tapering and rate hikes and the central bank’s policy approach is ultimately data dependent.
Today, there is a relatively quiet macro schedule in the US, though the August print of the Conference Board measure of consumer confidence will attract some attention. The University of Michigan’s index for the same month pointed to a sharp drop in sentiment on the back of inflation fears and concerns over the spread of the delta variant. There is mounting evidence that the spike in Covid cases has resulted in a relatively pronounced slowdown in US growth in Q3, amplified by low vaccination rates in the South that have seen the healthcare system come under significant pressure. The deterioration in the epidemiological situation is also anticipated to have resulted in jobs growth having slowed quite considerably in August, with consensus forecasting that Friday’s key non-farm payroll figure will show a more modest increase of 750k rise after gains of circa 950k in both June and July.
Euro
The euro’s main pairs were confined to narrow ranges yesterday, with GBP/EUR operating in the upper half of the €1.16-1.17 band. As expected, the European Commission sentiment indices pointed to a slowdown in eurozone growth in August as the delta variant and supply chain disruptions acted as headwinds, while catch-up effects post-lockdown have begun to fade. The single market currency, however, found support after another key ECB official (Bank of France Governor Villeroy de Galhau) indicated that the central bank may begin to taper its own asset purchases later this year. The French policymaker hinted that bond yields may have fallen below the ECB’s implicit target after a rally in eurozone debt over the summer months.
Another positive for the euro was the release of German inflation figures for August, with the y-o-y rate rising to a 13-year high of 3.4%.
While this may be causing some discomfort for Bundesbank officials, the rise was largely a function of base effects (linked to this year’s rally in commodity prices & the reversal of a temporary VAT cut) and a temporary surge in demand after the end of lockdown. The German data suggest that today’s release of the August HICP inflation report for the eurozone will also point to a sharp uptick in price pressures, which could help the euro consolidate its recent gains. It is worth emphasising, however, that the ECB has previously indicated that this surge was coming and that it would see through it.
Sterling
Closer to home, a quiet macro schedule means that there is little out to influence sterling. This will be the case for much of the week, though domestic Covid data will bear close watching as cases and hospitalisations continue to tick higher.
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