It has been a fast-moving fortnight in currency markets. Sterling touched a three-month high against the dollar in mid-August, only to give back much of that move after Federal Reserve chair Kevin Warsh used his Jackson Hole keynote to signal a firmer stance on interest rates. The euro has fared better, supported by stickier inflation and a more hawkish tone from the European Central Bank.
None of the major central banks is currently cutting rates, an unusual position after two years dominated by talk of who would ease first. This week’s UK services data, eurozone inflation print and US jobs report will help determine whether that backdrop holds, or whether it starts to shift again.
Dollar rebounds hard as Warsh delivers a hawkish Jackson Hole debut
The dollar staged a sharp turnaround last week after Federal Reserve chair Kevin Warsh used his first Jackson Hole keynote to strike a notably hawkish tone. Warsh told delegates that policymakers need clear evidence inflation is moving back to target at sufficient speed, warning that the Fed still has work to do, and reaffirmed the 2% inflation target as fixed rather than open to reinterpretation. The remarks followed a rare three way dissent in favour of a rate rise at the Fed’s July meeting, the first split of its kind in around a decade, and markets responded by sharply raising the odds of a September increase. The dollar’s rally reversed several weeks of softness that had been driven by concerns over the US bond market and increased Treasury buybacks, and it now sets the tone heading into this week’s jobs data.
Sterling pulls back from three-month highs as rate expectations reset
Sterling had climbed to its strongest level against the dollar in three months earlier in August, supported by resilient UK data and a broadly softer dollar. That move has partly unwound following the Fed chair’s comments, though the pound’s underlying position looks different to previous cycles. UK inflation accelerated to 2.9% in July, up from 2.6% in June, largely reflecting the latest Ofgem energy price cap change rather than a fresh burst of demand. With several Monetary Policy Committee members already open to a further increase, and gas prices sitting at a three-year high, the path for UK rates looks less one-directional than markets had assumed earlier in the summer. The Bank of England’s next decision is not due until 17 September, so sterling is likely to keep taking its cues from US developments and broader risk sentiment in the meantime.
Euro holds firmer ground as inflation and ECB signals diverge from Washington
The euro has proved more resilient than sterling through the recent dollar rally, helped by a firmer inflation and growth picture across the eurozone. Annual inflation rose to 2.9% in July, with core inflation at 2.5%, and price pressures picked up across Germany, France and Spain. The European Central Bank’s account of its July meeting, published last week, gave the clearest sense yet of how divided the Governing Council was over its decision to hold rates, and today’s flash inflation estimate for August is an early test of whether that debate is moving toward a firmer policy stance. For euro pairs, that keeps the near-term story less about the dollar and more about whether eurozone price pressures continue to build.
The week ahead:
- Eurozone flash inflation (August) – 01/09 – EURUSD, EURGBP
- UK final services PMI (August) – 03/09 – GBPUSD, GBPEUR
- US non-farm payrolls (August) – 04/09 – GBPUSD, EURUSD
With a busy week of UK data ahead, alongside Wednesday’s Federal Reserve minutes, now may be a good time to speak with your currency specialist about how these developments could affect your currency requirements.
