So far this month (and quarter) there has been a more dominant trend towards dollar strength. It’s happening around 6 months later than anticipated, but nevertheless it is emerging. Earlier in the month, this was coming on the back of interest rates moves working in the dollar’s favour (2Y market rates), but we are also seeing signs of independent strength, the US 2 year only marginally higher over the month so far. Yesterday, this allowed for EURUSD to make another low for the year, breaking to the downside of the tight range that had held for the previous four sessions. No doubt this will be welcomed by the ECB, but to be clear it is the dollar that is driving the move.
Overnight, we’ve seen the Aussie rally back above the 0.94 level after the latest quarterly inflation data. The numbers were broadly in line with expectations, headline coming in at 3.0%, but the Aussie saw a decent amount of short-covering as the market was fearful of weaker numbers. There is growing talk of a possible rate cut, especially if the Aussie retains the generally firmer tone. But it could well be that we get more vocal intervention from the Reserve Bank of Australia before that happens.
The main risk is with sterling today, where we have the release of the July MPC minutes. There remains a chance that we see at least one member of the rate-setting committee voting for higher rates, the minutes having reflected the fact that the steady rate outcome has been more balanced for some in the past couple of months. Sterling has stalled more recently, which fits with the reversal we’ve seen in 2Y rate spreads between the US and UK. At least one vote for higher rates would give the currency a fresh leg higher.