USD

The dollar has gained against its competitors this week as risk off sentiment grows and investors look towards safe haven currencies. This follows the chaotic situation unfolding in Afghanistan and the threat posed by Covid’s delta variant. 

Yesterday also saw the release of the minutes from the last Federal Reserve’s policy meeting. While no firm decisions were made, most participants agreed it could be a good idea to start tapering asset purchases later this year.

However, this doesn’t mean the bank will start raising interest rates more quickly. The minutes confirm officials believe the Federal Open Market Committee (FOMC) should reaffirm any link between the timing of tapering and an eventual increase of interest rates first.

With more officials now openly discussing tapering – and after July’s strong employment report – it seems pretty likely the Fed will start later this year. But we’re unlikely to see a decision made until September’s FOMC meeting. It will also probably hinge on another solid rise in payrolls for August.

The market’s focus will now turn to next week’s Jackson Hole speech and any more clues on when the tapering could begin. 

GBP

The pound is finally advancing despite yesterday’s weaker than forecast Consumer Price Index (SPI) inflation data. The July CPI reading revealed prices rose 2% Year-on-Year in July, down from 2.5% in June and softer than the 2.3% forecast.

Headlines warning of hyperinflation and the threat of higher borrowing costs look a little premature after the inflation rate fell by more than expected in July, easing back down to the Bank of England target of 2%.

Much of the speculation after a rise in June to 2.5% asked whether the UK was heading for a long period of spiralling prices that would force a move in interest rates. Although inflation is still expected to rise further this year, the fall in July means pressure on the central bank to calm the economy with higher borrowing costs has eased somewhat for now.

EUR

Eurozone inflation grew to 2.2% in July from 1.9% in June, marking the highest annual rate in nearly three years. The EU’s statistics office confirmed this is above the European Central Bank’s 2% target. CPI in the Eurozone also came in weaker than forecast as -0.1% decline Month-of-Month. However, on an annual basis. 

Key announcements

13:30 – USD – US unemployment claims
13:30 – USD – Philly Fed Manufacturing