GBP

The pound lost considerable ground against the euro and dollar throughout the week and continues to fall as the weekend approaches. 

UK Consumer Price Index data came in at 2% earlier in the week, right on the Bank of England’s (BoE) target inflation rate. This is down from a previous 2.5%. This suggests the BoE’s longstanding view that this is just transitory may just prove to be true.

As a result, the pound lost ground and with it any chance of a sooner than anticipated rate hike next year. While this was only one reading, if the BoE is correct, inflation could remain around 2% in the months to come. Therefore the chance of any imminent change in monetary policy is slim. 

With this market shift to risk off, it’s hard to see where sterling’s next gains come from. 

USD

It was a largely different story across the pond. This week’s Federal Reserve meeting saw members at least aim to start tapering assets by the end of the year. However, they did say this early tapering was not a precursor for rates to increase right away.

Markets have taken this as largely positive, seeing a clear indication the Fed will be the first central bank to raise rates. As a result we’ve seen the dollar strengthen significantly against all majors. 

Another reason for current dollar strength is the demand for safe haven currencies. The situation in Afghanistan has put the world on edge and in these times the dollar benefits. 

The dramatic rise in delta variant cases in the US is also increasing that demand. Daily infections have gone from 10,000 per day in early July to around 150,000 this month. Even though it’s the US being impacted, safe haven currencies like the dollar still benefit.

Key announcements

GBP – Retail July sales: -2.5 from 0.2 
GBP – Retail sales YoY : 2.4% from 9.2