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Dollar talked into fresh new lows

Dollar talked into fresh new lows

GBP 
The GBPUSD pair recovered from a daily low of 1.2998 yesterday, now trading near the 1.3130 level. The broad-based USD selling following the Federal reserve rate decision in the States pushed the GBPUSD pair above the 1.31 handle.

The Pound shrugged off tepid Q2 GDP as the economy is estimated to have grown 0.3% in the three months to June. The figure matched market’s expectations but fell short of backing a rate hike in the UK. On a yearly basis, growth was of 1.7%, also in line with market’s forecast.

The UK Home Secretary, Amber Rudd, explained this morning ‘I want to reassure business and EU nationals that there will be no cliff edge once the UK leaves the EU.’ At the same time, the UK Immigration Minister, Brandon Lewis, was also quoted as saying that free movement of labour will end when we leave the EU. Who knows what impact this may have on the UK economy?

USD

The US Dollar licked its wounds yesterday as the currency recorded strong losses hitting fresh 13-month lows. Although New Home Sales came out lower than expected, this was not the cause of the Greenback’s weakness.

The likelihood of the US Federal Reserve’s rate hike by the end of this year was dampened by careful wording by Fed Chair Janet Yellen on the inflation outlook. The recognition of soft inflation, which previously had been considered as transitory, led investors to believe that it will be unlikely that there will be a third rate hike by the end of the year.

The Fed said expectations were that inflation will rise to 2% following a period of being below that marker and they want to continue gradual tightening. That said, the US Dollar’s perceived interest rate advantage is decreasing as many other central banks in recent months have begun winding back their stimulus.

Today, US durable goods and jobless claims data are out. Unless there is substantial difference in consensus figures, further selling of USD is likely to be restricted with limited data across other major currencies out.

EUR

The increasing weakness surrounding the Greenback pushed EURUSD above the 1.1700 handle yesterday, although the upward move lost some momentum in the vicinity of 1.1780 and has dropped back to the 1.1720 area.

The current strength of Euro area growth and high current account surplus (3.4% of GDP) does not necessarily warrant the degree of Euro undervaluation vs USD that has been seen recently. That has been reinforced by the European Central Bank’s (ECB) upgraded forward guidance and has been reflected in the value of the Euro. Although the exchange rate may not be a policy tool, this doesn’t mean that the ECB will tolerate a sustained appreciation in the exchange rate. A ‘too strong’ exchange rate could undermine any fragile improvement in inflation whilst tighter monetary conditions could restrain a recovery.

German economy minister, Brigitte Zypries, expressed his concerns this morning on the difficulty in US-German relationship over sanctions against Russia. The US has abandoned the common line it had with Europe on sanctions against Russia. In response to this, the German industry committee has warned that US plans for sanctions against Russia could harm European companies with energy interests. The Committee also added that the sanction plans are designed to stimulate US energy exports to Europe.

Data To Watch:
6:00am EUR Gfk Consumer Confidence Survey (Aug)
12:30pm USD Chicago Fed National Activity Index (Jun), Initial Jobless Claims (Jul 21), Continuing Jobless Claims (Jul 14), Durable Goods Orders ex Transportation (Jun), durable Goods Orders (Jun),
11:01pm GBP Gfk Consumer Confidence (Jul)

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