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Currency Market Analysis

Jul 11, 2019 | Currency Market Analysis

Global Themes

Dollar dumped on dovish Powell 


Pound rebounds before financial stability report

As Sterling sagged towards 2-year lows versus the US Dollar yesterday, GBP/USD suddenly popped higher after US Federal Reserve (Fed) Chairman Jerome Powell’s dovish testimony to Congress. The currency pair reclaimed the $1.25 handle, but momentum fizzled out and Sterling failed to notch a new daily high for the week.

Beleaguered by Brexit uncertainty and the threat of the UK exiting the EU without a deal, Sterling has fallen circa 6% against multiple currency pairs since early May. GBP/USD fell near to its lowest level since April 2017 on Tuesday but a sudden weakness in the US Dollar saw the currency pair clamber back towards $1.25 where it resides today. Fed Chair Powell warned of mounting risks to the economic outlook and that weak inflation may persist. This dovish tone cemented the case for a US interest rate cut at the end of the month and dollar selling resumed, allowing GBP/USD to climb.

The rebound was weak though, despite better-than-expected UK data earlier that day. The UK financial stability report will be released at 9:30am today and could induce Sterling volatility. Clues about the impact of Brexit and what a no-deal Brexit might mean for the UK economy will be key.


US inflation in focus

US Consumer Price Index (CPI) for June will be unveiled at 1:30pm this afternoon. Headline CPI is forecast at 0% m/m compared to 0.1% in May, while 1.6% is forecast y/y, down from 1.8% previously. US economic data will be key in determining whether a US rate cut will indeed be triggered this month.

Although Mr Powell seemed to endorse a rate cut in his testimony yesterday, the Fed Chair also emphasised that a vast amount of key economic data is due before the rate decision on July 30. Should the inflation numbers surprise to the upside today, the dollar could reverse yesterday’s losses and pull EUR/USD back towards $1.12 and GBP/USD back towards $1.24. A weaker print is unlikely to spark a further dollar decline since the market is fully pricing in a 25-basis-point cut. Should scope for a 50-basis-point cut begin to garner more attention again, the dollar sell-off may continue.

The probability of a 50bps cut jumped from 3.3% to 25.6% after Mr Powell’s dovish comments yesterday and EUR/USD recorded its biggest daily gain this month as a result. This probability shift will be key in determining the strength of the dollar and whether this pair can edge closer towards $1.13.


GBP/EUR stomaching record losing streak

The pound has fallen for nine consecutive weeks against the Euro and is on track for a tenth as it hovers around the €1.11 mark. It’s the longest weekly losing streak versus the Euro since the common currency began trading in 1999.

The near 6% fall in the currency pair over this 9-week period reflects the lack of demand to buy Sterling amidst the Brexit and political turmoil that persists. The Euro itself isn’t the most favoured currency amongst the majors though, due to the poor economic conditions and outlook in the Eurozone. There is a growing probability that the European Central Bank (ECB) might cut interest rates and introduce quantitative easing again to support the struggling Eurozone economy. Such a move should weaken the Euro, but as this is a recurring theme across global economies, including the UK, GBP/EUR remains under downside pressure. The ECB will release the minutes of its June policy meeting at 12:30pm today and market participants will keep an eye out for any clues on potential stimulus measures to come.

German inflation data has already been released this morning and supported the Euro’s recent uplift. The final inflation reading for June jumped to 1.5% from 1.3% y/y. If Euro demand picks up enough to drag GBP/EUR below €1.11, then €1.10 could be the next pit stop. 

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