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Markets around the world are nervous about the potential impact of a continuation of coronavirus restrictions. The dollar benefited from this last week. The consensus seemed to be that the effect on growth expectations in the U.S. is becoming comparatively milder than elsewhere, and that was an advantage for the greenback.
The hawkish tone of the minutes of the Federal Reserve's last meeting, which seems to indicate that a gradual tapering of stimulus is possible as early as 2021, also contributed. The big losers last week were commodity prices and the rates of commodity-dependent currencies such as the Australian and New Zealand dollars.
Markets will now turn their attention to the annual international meeting of central bankers in Jackson Hole, which begins on Thursday, and a stream of economic releases from the U.S. and the eurozone. We expect the Fed to hint that stimulus will be phased out from the end of 2021 onwards when it comes to the timing of policy tightening. The main releases are the PMIs for August from the Eurozone (Monday) and the PCE inflation report from the US (Thursday). Below are the major currencies in detail
In the eurozone, too, we see little room for a market-shocking surprise in the PMI indices (Monday). The minutes of the ECB's July meeting are more important. Even the slightest hint that people are hawkish about the improved economic outlook and rising inflation could give the euro a boost. The coin could also benefit from the favourable investor positioning and the current, relatively low price.
Inflation was much lower than expected in July. This is another sign that the level of inflation peak will vary significantly across economic areas. The 'doves' (pigeons) within the Bank of England are in a stronger position because of this news. The British pound reacted with a fall against both the dollar and the euro.
The economic activity PMI indices are the main news this week. Markets are once again expecting a very good figure, confirming a rapid economic recovery in the UK. So there is little room for a positive surprise, which would support the exchange rate of the pound.
The minutes of the last Federal Reserve meeting were more hawkish than the markets expected. It seems likely that the Fed will start tapering its quantitative easing program before the end of the year. We now expect this to be announced in September and to be hinted at during the Jackson Hole chatter. We have aligned our short- and medium-term forecasts for the dollar with this expectation.
If the PCE inflation numbers (this week) and the jobs report (next week) are good, nothing will stand in the way of this measure. The question is, of course, whether this will be enough to push the dollar up further, given the large difference in inflation that is beginning to emerge between the US and other major developed economic areas and countries.
By: Enrique Diaz-Alvarez
Enrique Diaz-Alvarez is chief risk officer and heads Ebury's analyst team in New York. Because of his drive, passion and thorough knowledge, Enrique is recognized by Bloomberg as one of the most accurate predictors of market movements.
About Ebury:
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