Will the Dollar Continue to Strengthen?
Will the Dollar Continue to Strengthen?
The UK got its monthly data MOT last week, which gave mixed signals on employment, slightly cheery Retail Sales but certainly worrying inflation data. With the Consumer Price Index now into double digits and looking to go higher over the next few months, the past inactivity of the Bank of England is now coming home to roost, and they may be forced to move interest rates higher than they had hoped. Indeed, a 50bp move in September looks nailed on, and puzzlingly the derivative markets are looking for a 56bp activity which perhaps is a hint to what may follow in the coming months. The US Federal Reserve has been the very opposite of the UK, and their willingness to act decisively was reinforced last week by the minute from the previous FOMC meeting, which, when digested, led to a strong rally in the dollar, pushing the euro perilously close to parity which it looks sure to break – if it hasn’t done so by the time this reaches your inbox.
This week sees the last few days of beach and deckchairs for many and ends with the last bank holiday of the year in the UK, traditionally a weekend of umbrellas, not sunshades, but hopefully, I will be proved wrong this year! We have a relatively busy few days for the data docket with plenty to occupy the great and the good, ahead of the Jackson Hole Policy Symposium starting on Thursday. After Friday’s strong rally in the dollar, the question in most people’s minds will be, “can it continue”? This morning, at least to start with, it looks to be maintaining its strength with sterling and the euro looking particularly vulnerable. However, with many senior traders still away, the fireworks may be put on hold for a little longer as the markets stay relatively thin
Sterling is matching the England Cricket team in its performance and looks in trouble against the resurgent greenback whilst also slipping against the euro in recent trading sessions. The concerns for the UK economy worsened last week when the official inflation figure was announced at 10.1%, which, as we have said before, is somewhat lower than it appears to be when one goes shopping. Indeed, Citibank is predicting it to reach 15% next year. With the Bank of England’s recent history of prevarication on rates and seeming paralysis in the face of a crisis, we may well indeed see inflation in the teens. With a recession staring the UK in the face and inflation taking hold, the Bank faces a tough policy decision between the devil and the deep blue sea. At least there is some respite from data this week with only Preliminary, or Flash, Purchasing Manager’s Indexes being published on Tuesday. PMIs have held up recently, but, as elsewhere, August is typically a slow month, so a disappointing number may be published.
The Eurozone is very similar to the UK, highlighted by July’s rise of 37.2% in German Producer Prices, its fastest rise ever and an astonishing jump by any measure! With inflation still headed higher, a weak currency and the threat of a recession, the ECB has many of the same problems as the Bank of England. The methodology of how the central Bank intends to deal with its problems may become a little clearer this week with the release of the minutes from its last meeting. Tomorrow we should get a further feel on how the Eurozone economy is headed with the release of consumer confidence and S&P’s Purchasing Managers Indexes. Having dipped into contraction territory last month, the composite PMI will be closely watched. It’s difficult to see beyond a further contraction, and with energy prices still rising and an ongoing drought, we have worrying times ahead.
Not that the US has any reason to be smugly looking across the Atlantic as the Fed looks to continue tightening against the backdrop of a possibly faltering economy. With traders’ opinions divided between those seeing a 75bp move and those seeing a 50bp at the next Fed meeting, the market feels evenly balanced. Whether Jerome Powell’s speech, during which we expect more tough talk on inflation at Jackson Hole, changes this balance is unlikely with another set of employment and inflation data scheduled to be published ahead of the Fed meeting on 21st September. But what is not in doubt is that the Fed will keep talking tough, and once again, the dollar looks like the currency to be holding, and we could see fresh lows on both sterling and the euro in the week ahead.
Plenty of data is lined up for release in the US this week, starting tomorrow with S&Ps Purchasing Managers Indexes, followed on Wednesday with Durable Goods orders. We expect a possible upward revision to Second Quarter Gross Domestic Product and initial jobless claims to stay steady on Thursday. The most likely figure to jolt the market is released on Friday when household spending data (PCE) is released which is one of the Fed’s favoured numbers for measuring inflation.
This week’s question for the market is, with the dollar gaining over 3% in the last month will traders book profits before the big guys return to their desks from the delights of The Hamptons and The French Riviera? As we said earlier, we still fundamentally believe that the dollar will maintain its strength. With interest rates still set to rise further in the US and the Fed unlikely to signal a pivot, we think that any setback for the dollar would be temporary, so any drops ahead of the long weekend in the UK should be taken advantage of. Have a good week and stay careful!
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