The dollar attracted good support at the end of last week, with cable drifting back down to the $1.39 level and EUR/USD pushing back away from the $1.19 threshold. There was no fundamental driver of the move, though we had highlighted earlier in the week that we believed that the emergence of greenback weakness following the Fed meeting on Wednesday night looked overdone and appeared to be exacerbated by month-end flows. The central bank is clearly in no rush to taper its asset purchase programme, but is becoming incrementally more hawkish. In April, Chair Powell was guiding that it was not appropriate to discuss tapering, whereas last week we heard that the economy had made progress toward the goals set out for tapering. We forecast that the process will begin in Q122, but acknowledge that risks are tilted toward an earlier start date.
The highlight of a busy US macro schedule this week will be the release of the US employment report for June, which will attract added attention given that the Fed has guided that a sluggish labour market recovery is the main factor behind its reluctance to remove policy supports at this stage. Consensus anticipates a +900k rise in non-farm payrolls and a print close to or above this level could see the dollar make decent gains. However, the persistence of the pandemic and the availability of enhanced jobless benefits in many states will act as headwinds to labour supply. Earlier in the week, the ISM business surveys (manufacturing index due today) for July will be looked to for evidence of how a rise in US Covid-19 cases and ongoing supply chain issues are impacting activity, with the data expected to point to a modest easing of growth.
Sterling opens this morning off last week’s peaks, but GBP/EUR continues to trade near recent range highs above the €1.17 level. This week, Thursday’s Bank of England meeting is the star event of a muted UK calendar. Back in July, two central bank officials (8 vote this week) indicated that they were in favour of prematurely ending the central bank’s asset purchase programme before it hits its £895bn cap, after inflation unexpectedly picked up to 2.5% y-o-y in June (target: 2.0%). These officials appear to be in the minority, however, with other policy makers guiding that they believe the increase in price pressures will be a temporary phenomenon and that inflation will subside as demand normalises and supply chain disruptions are resolved. As such, no changes to policy are anticipated, though if more than two Monetary Policy Committee members dissent, sterling could rally as this would imply that the BoE is gradually becoming more hawkish. For a more in-depth preview of the meeting, please see our latest weekly.
It could be a quiet week for the euro, with little out to provide direction. Eurozone retail sales and German industrial output figures (both July) are the main items of interest, but as the data lag the release of robust (+2.0% q-o-q) Q2 GDP data published last Friday they will have limited impact on the single market currency. As outlined in the weekly, a strong cyclical recovery is currently underway in the eurozone and that should see the euro remain reasonably well supported in the coming weeks. We do, though, remain long-term bearish on the currency, given our view that structural flaws in the design of the eurozone means that it will continue to struggle to generate sufficient domestic demand to prompt the European Central Bank to tighten monetary policy.
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