20/08/2020

Sterling rally short-lived


GBP

Sterling finished the day lower against both the euro and dollar yesterday despite inflation data surpassing market expectations to show a positive return to activity for the UK economy.

Data released by the Office for National Statistics (ONS) showed Year-on-Year UK Core Price Inflation rose from 0.6% in June to read 1% in July. According to the ONS, clothing and footwear prices were the biggest contributor to the rise in inflation for July with higher fuel costs, haircuts and dentistry making notable contributions.

Despite the rise in inflation for July, there are concerns that July’s unexpected rise will be short lived as economists expect a significant fall heading into year end. One of the main reason for this fall is unemployment levels which are set to increase due to the government’s job retention scheme coming to an end. This scenario would support the Bank of England’s latest projections unveiled during its most recent policy meeting; members predict the inflation rate to average 0.25% in the latter part for 2020.

USD

The dollar rallied from two year lows yesterday morning to finish the day higher against a basket of currencies.

The appreciation in the dollar yesterday afternoon follows the release of the Federal Reserve (Fed) minutes from the Fed’s policy meeting last month. The minutes disappointed dollar bears who were hoping for clues that the Fed would adopt an even more dovish policy shift this year, but this wasn’t immediately clear from the minutes.

The recent depreciation in the dollar has been caused by the Fed’s attempts to intervene and counter the economic fallout caused by the coronavirus pandemic which has resulted in a dramatic sell off in safe-haven positions in favour of more riskier assets.

Speculation has been rife that the Fed will adopt an average inflation target to try and push inflation above 2%. In other words, not only will the Fed tolerate inflation above its 2% target but would favour it. This has caused significant selling pressure on the dollar as it effectively means that any plans for the Fed to tighten monetary policy are someway off, prompting investors to look elsewhere to park their money to eventually reap the reward of higher interest rates.

Key announcements

13:30 – USD – Continuing Jobless Claims (AUG 7) expected to fall to 15M from 15.486M
13:30 – USD – Initial Jobless Claims (AUG 14) expected to fall to 925,000 from 963,000 previous
13:30 – USD – Philadelphia Fed Manufacturing Survey (AUG) Expected to fall to 21 from 24.1 previous


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