US dollar hits new lows ahead of FOMC meeting minutes

The key trend that we have witnessed in the foreign exchange market in the past three months continued once again on Tuesday, with the US dollar selling off against just about every other major currency.

The sharp depreciation seen in the greenback since the beginning of June is turning into a move of unprecedented magnitude. Against the dollar, the euro is currently trading at its strongest position since May 2018, up almost one percent for the week already and over 6% since the start of last month. Sterling gained by an even greater amount on Tuesday, breaking through the 1.32 level and sitting comfortably at its highest level since the UK’s general election in December 2019. In fact, the dollar has lost ground against every other G10 currency in the past two months, particularly versus those deemed as higher risk, notably the Norwegian krone and Swedish krona that are trading almost 10% higher during that time.

The rationale for the sell-off in the currency continues to be much the same, namely the high levels of virus contagion in the US and concerns over the country’s economic recovery relative to the rest of the developed world. There also remains no news out of Congress on an agreement to extend the government's additional unemployment insurance benefits programme. To worsen sentiment further, Donald Trump stated yesterday that problems with mail-in voting during November’s Presidential election may force officials to re-do the vote.

Investors will now be looking to tonight’s FOMC meeting minutes for a catalyst that could trigger a reversal in the recent move. There has been talk that the Fed may adopt a more relaxed view of above target inflation - any comments regarding this would likely be a market mover later today.

UK inflation rebounds sharply in July

A sharp rebound in UK inflation this morning was largely overlooked by currency traders. According to data from ONS, headline inflation jumped back up to 1.0% in July from June’s 0.6% reading. While this is not particularly good news for consumers, it does at least suggest that spending activity is rebounding well as lockdown measures are lifted and retail outlets return to some form of normal capacity.

It will be interesting to see whether this increase in price growth deters the Bank of England from easing policy further when its QE programme is expected to run dry later this year. At this stage, we don’t think that it will, although it would certainly provide reason for cautious should inflationary pressure continue to rise at the current pace over the coming months.