USD: Dollar rises with yields after inflation surprise
The US dollar is trading more steadily after recent volatility, with attention shifting back to the inflation outlook and Jackson Hole. Yesterday’s US data saw July’s core PCE data matched expectations, but headline inflation came in slightly firmer than forecast. This reminds markets that price pressures are easing only gradually. The release was not strong enough to decisively revive September hike expectations, but neither was it weak enough to validate a more dovish policy outlook and weaken the dollar further.
The broader macro picture remains mixed. Inflation continues to make slow progress towards target, leaving the possibility of a rate hike later this year firmly on the table. At the same time, consumer fundamentals remain soft, with real incomes showing little meaningful improvement despite some rebuilding in household savings. Elsewhere, business investment remains resilient, while recent activity indicators point to growth that is holding up rather than reaccelerating.
For the dollar, the bigger debate is increasingly about policy credibility. Rising long-end bond yields, Treasury intervention and renewed discussion around fiscal sustainability have revived a policy risk premium in the dollar’s value akin to periods witnessed last year after Trump’s tariff rollout. As a result, this has limited the dollar’s ability to benefit from elevated yields in the traditional way.
The bottom line: the dollar appears caught between resilient nominal growth on one side and growing policy-related concerns on the other. Jackson Hole, which kicks off today, now becomes the key event risk. Should Fed Chair Warsh (key note speech on Friday) disappoint traders again with a lack of transparency on the his economic and policy views, renewed credibility concerns might amplify dollar downside risks.
EUR: Euro can’t escape geopolitics
EUR/USD fell to a one-month low yesterday following a hotter-than-expected PCE inflation report. Short-end Treasury yields moved higher as September Fed hike expectations remain alive. The move at the front end later broadened into a more synchronised sell-off across major bond markets, however, after reports emerged that President Vladimir Putin is planning an escalation in Ukraine.
Energy prices, particularly gas, moved higher. This weighed on the energy-dependent euro while providing some safe-haven support for the dollar.
Regardless of the source of the conflict, higher energy prices are negative for the eurozone’s terms of trade. This brings growth concerns back into focus and undermines what would otherwise be a more constructive backdrop for the euro, with the recent run of solid macro data lending greater credibility to the ECB’s hawkish stance. As long as geopolitics continues to creep back into investors’ minds, a more compelling bullish case for the euro is unlikely to emerge.
We will continue to monitor developments on the Russia-Ukraine front, but it is still too early to view the situation as a sustained bearish driver for the euro.
For the remainder of the week, attention will turn to preliminary August inflation readings from some eurozone member states, notably Spain and France. The market impact is likely to be limited, but the data should reinforce the case for a rate hike next month, with headline figures expected to rise by 0.6 percentage points and 0.3 percentage points, respectively.
GBP: Keep calm and carry on
The pound remains relatively well supported despite a backdrop that is hardly unequivocally sterling-positive. GBP/USD has slipped back below 1.36 as the dollar firms across the board following yesterday’s stronger US data and a modest pickup in safe-haven demand. However, the decline has been contained, highlighting that the broader uptrend remains intact for now.
Global factors continue to dominate. Geopolitical uncertainty, elevated oil prices and a somewhat underwhelming reaction to Nvidia’s latest earnings have kept risk appetite in check. As a high-beta currency, sterling typically performs best when investors are comfortable taking risk. Yet despite the more cautious tone, the pound has remained resilient.
One reason is the continued appeal of carry trades. UK yields remain high by developed market standards, even if expectations for additional Bank of England tightening have moderated. Investors can still earn a meaningful yield pickup by holding sterling relative to lower-yielding funding currencies, particularly the JPY, CHF and EUR. That support has helped prevent a deeper correction in GBP.
Against the euro, sterling has eased this week as the single currency benefits from a run of firmer eurozone data. Even so, GBP/EUR remains comfortably above its long-term breakout zone, suggesting recent weakness is more consolidation than reversal.
For now, the near-term outlook leans slightly softer as global risk sentiment remains fragile. However, with carry still attractive and UK yields elevated, any sterling weakness is likely to prove relatively shallow unless volatility picks up materially or investors begin to question the UK’s fiscal trajectory more aggressively.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: August 24-28
All times are in BST
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
