Written by Convera’s Market Insights team
Dollar poised for worst month of 2024
George Vessey – Lead FX Strategist
The US dollar ticked higher on Thursday after data showed the US economy grew at a slightly stronger pace in the second quarter than initially reported. However, the world’s reserve currency has fallen in every week so far this month and is on track to record its worst month of 2024 so far.
Real US GDP for the second quarter was revised higher amid upward revisions to consumer spending. The second estimate of real 2Q GDP was to 3.0%, 0.2 percentage points higher than the advance estimate. Despite the large upward revision to consumer spending, now estimated to have grown 2.9%, investment and several other major categories were revised lower. Thus, confidence that the Federal Reserve (Fed) will soon start easing remains high and has emboldened traders to make riskier investments, fuelling demand for high-yielding currencies such as the New Zealand dollar and Swedish krona. The US dollar looks to be attempting to recoup some of its recent losses considering how much it has sold off, but a resounding comeback looks remote if market pricing on the Fed is largely right.
Further signs of labour market weakness in the upcoming August jobs report next week could lead the Fed to kick off its easing cycle with a more aggressive 50-basis-point cut at September’s meeting. However, in the meantime, the Fed’s preferred measure of inflation – PCE price index figures are due today, which could be market moving, especially if we see a beat of expectations, helping to prop up the dollar into month-end.
Pound comfortable, but tests loom
George Vessey – Lead FX Strategist
Despite the pound slipping from 2-year highs against the US dollar, it is poised to record its biggest monthly gain since November and remains over 6% above its 2-year average rate of circa $1.24. The Bank of England’s (BoE) broad sterling index is back to challenge the July high which marks the highest levels since the Brexit vote in June 2016.
Elsewhere, GBP/EUR is a whisker away from the €1.19 handle – a level it’s only been above for 16 days of the past two years. Driving the pound higher has been the stronger-than-expected batch of UK economic data recently versus the unease both in the Eurozone and now emerging in the US, too. As a result, the BoE has cautioned against aggressive policy easing and markets have listened, pricing in just 40 basis points of cuts this year. Thus, FX options traders are the most bullish on the pound’s prospects over the next month since 2020, as investors continue to reassess the relative interest-rate path of the Fed and BoE.
However, with Fed-driven dollar weakness largely priced in, there’s no clear trigger for the next leg up to test $1.35. Coming into focus, after Fed and BoE decisions next month, is UK Chancellor Reeves’ first budget at the end of October. This could be critical in shaping near-term cyclical expectations and gauging the sustainability of sterling’s bullish run so far in 2024.
Eurozone inflation drops to 3-year low
Ruta Prieskienyte – Lead FX Strategist
The euro extended this week’s decline close to 1%, plunging an additional 0.4% on Thursday, driven by soft preliminary inflation data from Europe and signs of strong US economic performance. European stocks and bonds advanced as investors welcomed the softer-than-expected German inflation data, which is expected to influence today’s headline rate, bolstering hopes for ECB rate adjustments.
The preliminary annual inflation rate in Germany unexpectedly fell to 1.9% in August, below forecasts of 2.1%, down from 2.3% the previous month. This marks the lowest rate since March 2021. Compared to the previous month, the CPI edged down 0.1%, versus expectations of a 0.1% increase. Meanwhile, the EU-harmonised CPI dropped to 2% year-on-year, below the consensus of 2.3%. Meanwhile, the flash annual inflation rate in the Eurozone fell to 2.2% in August, down from 2.6% in the earlier month, to mark the softest increase in consumer prices since July 2021.The slowdown was due to a sharp decline in energy costs thanks to base effects. On the contrary, services inflation, a closely observed metrics by the ECB, picked to 4.2%, while core cooled to 2.8%. The month-on-month inflation edged higher by 0.2%, in line with expectations.
This downside surprise cements the case for the ECB to cut in September, but the path beyond remains uncertain, with the central bank abandoning forward guidance at its last meeting in July. In an interview, the ECB’s Patsalides confirmed that further rate cuts are likely if the ECB’s projections continue to materialise, while others urge caution.
EUR/USD down 1% on the week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: August 26-30
All times are in BST
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*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.
