Currency Market Analysis

Aug 23, 2021 | Currency Market Analysis

Global Themes

Central bankers from around the world will meet in Jackson Hole for the annual symposium about monetary policy over Thursday and Friday. Many market participants expect the US Federal Reserve (Fed) to use this opportunity to provide more detail on the timing of tightening policy, which will drive US dollar demand this week.

The dollar has recently strengthened due to hints from the Fed about tapering its monthly purchases of $120bn of government debt, leading to rate hike bets increasing. The re-assessment of the global economic recovery is also spurring safe haven demand, benefiting the USD, amid rising Delta variant concerns globally. These main themes will continue to drive market sentiment and the Jackson Hole meeting could be crucial if the Fed does indeed shed more light on the tapering cycle. Recall, the Fed announced its new inflation policy last year and this year could confirm a quicker end to monetary support, which would likely hit equity markets and boost demand for the dollar. Data-wise, flash August PMIs are published later this afternoon which may jolt markets somewhat if the recovery phase looks to be slowing quicker than anticipated.

EUR/USD dropped to its lowest level of 2021 last week, but it too has bounced off recent 1-month lows.

GBP

This risk-correlated British pound has come under selling pressure versus many major peers amidst the rise in global risk aversion. Evidence that the global economic recovery is faltering, including the UK’s, has dragged GBP/USD to a key support zone around the $1.36 mark. This morning, flash PMIs will provide a critical gauge of manufacturing and services activity, which could steer sterling.

A third successive decline in the composite PMI is forecast, which may worry investors as continued supply chain constrains negatively impact UK businesses. Although the index is still forecast to be well above its 23-year average of 53.7 (still in expansion territory), the fact that the economic recovery may be slowing is weakening the pound. No other top-tier economic data is due from the UK this week, but sterling will also remain sensitive to the Jackson Hole meeting with risk titled to the downside amidst a potentially stronger-dollar scenario unfolding.

EUR

The euro has come under selling pressure against the dollar and other safe haven currencies like the JPY recently, but has strengthened versus more risk-sensitive currencies like the pound and commodity-linked currencies. Today’s flash PMI figures are a key focus for EUR traders, followed by German Ifo on Wednesday and the European Central Bank’s (ECB) meeting minutes on Thursday.

Last month, Eurozone businesses recorded their fastest expansion in more than two decades, which supported the common currency, but will ongoing supply chain disruptions lead to a deterioration in sentiment in this month’s report? Softer data today could weigh on the euro, but there is an upside EUR risk given the acceleration in vaccinations across the continent leading to further relaxations of lockdown measures, which likely boosted economic activity. Nevertheless, despite stronger growth preventing a sharper fall in the euro of late, the ECB has held firm in its dovish rhetoric to hold rates at record lows for years to come.

USD

The volatile geopolitical environment has yet to severely impact financial markets, but is should be noted that a G7 meeting to discuss the situation in Afghanistan will take place on Tuesday.

The US and European allies continue to evacuate diplomats and civilians amidst the chaos unfolding in Kabul. Widespread criticism of the handling of the withdrawal deal is also leading to calls of terrorism threats increasing in the future. Meanwhile, in China, no new locally transmitted cases of Covid have been reported for the first time since July, which is helping to revive risk sentiment this morning.


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