Fed Minutes Likely to Boost Dollar

GBP

The pound had a poor week as it lost ground versus every G10 currency, bar the Swiss Franc. Versus the dollar and euro, sterling depreciated by 0.3%. It appears that the bullish sentiment on the pound has lost support over the last week, as markets start to question the Bank of England’s optimistic outlook, given the recent virus wave. Data wise, GDP hit market expectations of 4.8% for Q2, showing a decent recovery from lockdown at the start of the year. But investors are still waiting to find out if there will be any economic scarring from the pandemic and how it will affect financial markets going forward.

Further evidence of economic scarring, or not, will be shown in this week’s busy data calendar. The first key event comes on Tuesday with UK jobs data which is expected to show a decrease in unemployment due to the recent rise in job adverts. This is followed by inflation data on Wednesday, which is also expected to decrease to 2.2%. Though UK inflation is expected to bounce this year due to the frothy nature of many markets. However, this reading shouldn’t affect the market too much, as investors are looking further ahead at the Bank of England’s plans for 2022. Overall, the pound is expected to stabilise this week with some upside potential versus the euro.

USD

The dollar didn’t do much better than the pound, as it was the 3rd worst performing G10 currency last week, losing 0.3% versus its largest trading partner the euro. The dollar finds itself in a precarious position in which rising rates are boosting the dollar but rising covid cases due to the delta variant is also causing a lot of risk. The 7-day average of new cases has more than quadrupled in the last 30 days and a rise in deaths has followed. Data wise CPI matched market expectations at 4.3% but the Michigan Consumer Sentiment Index was far worse than expected.

The dollar should be in for a mildly bullish week as markets will get further rhetoric from the Fed with the release of the minutes of the 28 July FOMC meeting. The minutes should shed light on how much progress has been made in both employment and price stability and when the Fed will be in a position to formally announce the tapering of its asset purchases. Many analysts believe that the Jackson Hole symposium which starts on the 26th of August will be the Fed’s event of choice to announce their plans going forward. On the data front, Retail sales will be released on Tuesday expected to shrink by -0.2% from a previous reading of 0.6%.

EUR

The euro finished last week strongly after narrowly escaping a 2021 low versus the dollar but may struggle to keep this momentum over the coming days as it remains vulnerable to any recovery by the dollar. The Euro weakened off from early on last week, with markets concerned about the coronavirus situation in Asia as well as the latest ZEW survey showing a sharp deterioration in business sentiment about the outlook for the German economy through Autumn. The other data of note for Germany was Harmonized Index of Consumer Prices, which released on Wednesday at the market expectation of 3.1%.

The euro is likely to stay under pressure due to a mildly bullish dollar as well as the difference between the ECB, Fed and BOE. The ECB look to keep rate on the floor whereas the two other central banks have a far more positive outlook over the next couple of years. Though in favour for the euro has been the recent pick up in vaccinations which should allow Europe to deal with the Delta variant far better than other parts of the world. In terms of data this week, we’ll get to see the first revision of the Eurozone 2Q GDP figure, provisionally at a strong 2.0% QoQ and also some final July CPI readings.