By Matthew Boyle
It is the US Dollar and Pound that dominate data releases this week. Yesterday saw the release of US inflation which came in slightly under expected, which saw the Dollar strengthen around half a cent against the Pound and around ¾ of a cent against the Euro.
The monthly figure came in at 0.2% and just under the expected 0.3%, with the yearly figure reading 2.9%, and down from the expected 3%.
Political uncertainties may be the biggest cause of movement in the coming weeks with President Trump threatening to remove Federal Reserve Chair Powell. This has left markets and investors alike uncertain about the USD in the short-term – a Powell exit could trigger a 3-4% drop in the Dollar with a widespread bond sell-off. Further Dollar weakness may also be seen due to many investors now shorting the typically safe-haven Greenback, with its value down now around 13% so far this year.
With the Dollar remaining volatile this could spell bad news for Euro buyers, as a weak Dollar usually results in a stronger Euro and puts pressure on GBP>EUR rates to move lower.
This morning we have seen UK inflation data released with the results beating expectations, allowing the Pound to regain around half a cent against both the Dollar and Euro. UK inflation rose to 3.6% year-on-year beating expectations for a reprint of the previous 3.4% figure. The core CPI rate which excludes energy, food, tobacco, and alcohol rose to 3.7%, from a previous 3.5% in May.
Market focus for the reminder of the week will largely be on UK employment data today. With the recently disappointing GDP figures and the Bank of England retaining a dovish approach to further interest rate cuts, a poorer-than-expected figure here could push rates lower. Should a weak pound combine with a weak USD, this will only likely encourage GBP>EUR rates lower. With the Bank of England expected to cut UK interest rates in September and Rachel Reeves expected to announce Tax hikes in the autumn Budget, the Pound looks to be in for a rough ride in the coming months. With the UK economy stagnating, a drop in employment would only accelerate the pace the BoE begins to cut rates, so today may be an important day for the Pound and the direction of exchange rates in the coming weeks and months.
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