The Indestructible Dollar

GBP: A welcome revision to GDP

The UK Office for National Statistics (ONS) gave UK policymakers a welcome boost on Friday by revising up GDP growth in 2021 by 1.7%. That means that the UK returned to pre-pandemic growth much earlier than believed and that the revision leaves Germany exhibiting the weakest post-pandemic performance in the G7. The revision could also provide a little more fiscal headroom for the government, and we would not be surprised if speculation grew over some fiscal giveaways in the Chancellor's Autumn statement due in November. Sterling has turned marginally better bid against the Euro over recent days. Expect it to trade between the €1.1628-1.1765 range in the near term. It is a quiet week for UK data, but there may be some interest in Thursday's release of the Bank of England Decision Make Panel survey. Lower inflation expectations would be welcome but will not be enough to prevent the BoE from hiking 25bp this month. ING believe that the market prices about 20bp too much into the BoE tightening cycle and that Sterling can soften a little in the fourth quarter.

No major data.

EUR: The return of stagflation?

Very quietly we are seeing the return of the term 'stagflation' to describe prospects for the Eurozone economy. The ECB is finally acknowledging that growth is going to be a lot weaker than their official forecasts while core inflation remains sticky above 5%. The ECB may push ahead with their final 25bp hike at their September meeting, but many think this will be a mistake. In the background, Eurozone politicians are still debating a return to a budget deficit criteria, which had been suspended during the pandemic. While this may be good for Eurozone government bond markets, its impact on the Euro (tighter fiscal, less tight monetary policy) would be negative. There are plenty of ECB speakers jostling for position over the final 25bp hike in September. EUR/USD is looking fragile and while it may not go anywhere today, a speculative market that is still long EUR/USD might have to cut positions if modest support levels at $1.0760/85 give way. Intra-day resistance may be found at $1.0820.

Data:

13.30: ECB's President Lagarde speech

USD: Little reason to offload Dollar positions

The Dollar has had a good couple of months. It has been buoyed by domestic strength in the US economy and souring sentiment in key trading partners such as Europe and China. The source of that strong domestic demand in the US has been a tight labour market, which has powered consumption. Despite US wage growth softening in August and the unemployment rate finally climbing, US Treasury yields actually rose on Friday and the Dollar strengthened. Driving that move may have been the rise in the participation rate with people returning to the workforce. This suggests that the narrative may have moved on from the disinflation debate towards the extension of employment, consumption and domestic demand. This week's US data calendar looks unlikely to open a decisive new chapter in this narrative – although in the past, the release of the ISM services index (releasing on Wednesday) has moved markets. Market expectations that Fed rates have peaked look set, as do views of a modest 100bp of Fed easing next year. There is little to challenge a strong Dollar this week.

No major data.

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