USD

The dollar reached a four month high vs the euro yesterday as the market prepares for the Federal Reserve to begin tapering its stimulus package. The currency was also up against most of its other major peers.

The gains build on the impact from last Friday’s strong Non Farm Payrolls. The US’s positive employment outlook now has investors seriously thinking the Fed may reduce its asset purchases by the end of the year with an interest rate rise in 2022.

This optimism was buoyed further yesterday as the Atlanta and Richmond Fed Presidents said they were considering an earlier rate hike. This is a clear sign there are detailed discussions beginning within the Fed about how and when to taper their purchases.

The dollar also benefitted as job openings, a measure of labour demand, rose by 590,000 to 10.1 million on the last day of June. The US Labor Department announced the increase on Monday. The strong reading reflects the speed of recovery from the pandemic.

Despite this, the number of people re-entering the workforce has lagged. Analysts have cited generous unemployment benefits, childcare issues and lingering worries about a new virus strain as potential reasons. Economists are now generally expecting a jump in hiring as schools reopen and crisis-era unemployment benefits come to an end.

US consumer inflation is out on Wednesday with the market expecting core annual inflation to ease to 4.3% for July after reaching a three decade high of 4.5% in June.

EUR

It was a bad start to the week for the euro. As well as the dollar’s four month high, the pound hit an eleven month high against the currency. This is despite Covid cases continuing to rise and little UK data to move the market. 

The euro has come under pressure after much weaker than expected Sentix investor reading. This is a survey of nearly 3,000 investors and analysts, who are asked to rate the relative six-month economic outlook for the eurozone.

The market will now be focusing on the eurozone and German ZEW economic sentiment data out at 10am. It’s expected to show a decline to 57 from 63.3, which will be a clear sign of the of the economic recovery starting to slow. This could put the euro under increased pressure against the pound. The British currency should have a smooth week ahead, with no UK data forthcoming that might pose a risk. 

Key announcements

10:00 – EUR – Eurozone ZEW economic sentiment

10:00 – EUR – German ZEW economic sentiment