FX Update – August 13 – Weaker Dollar & Stronger Sterling

<p>The Dollar is down for a second day, with the narrow trade-weighted USDIndex printing a six-day low at 93.08 to nearly fully unwind the gains seen in the wake of last Friday’s US July jobs report, when we printed an eight-day high at 93.87.</p>
<p>Some market narratives have been attributing the Dollar’s ebb as being a return of the currency’s inverse correlation with stock market direction, along with the perception that the Fed has strategically dropped its concern about inflation risk, which has driven real US yields into negative territory. These factors appear to be outweighing the improvement in the US economy and downward trend in new coronavirus cases. As for Washington’s tensions with Beijing, this hasn’t been much of a concern for Wall Street, with most onlookers anticipating this weekend’s meetings to review progress on the Phase 1 trade deal will go well, even though China has been lagging behind in its purchases of US farm and energy goods.</p>
<p>Among the main Dollar pairings, <strong>EURUSD</strong> climbed to a six-day high at <span><strong>1.1838</strong></span>, putting the 27-month high seen last Thursday at 1.1917 back in the scopes. <strong>USDJPY</strong> extended a moderate correction from yesterday’s three-week high at 107.03, posting a low at <strong><span>106.57</span></strong>. The Yen was more mixed against other currencies, with <strong>EURJPY</strong> remaining buoyant, just off the 16-month high that was pegged yesterday at <span><strong>126.23</strong></span>, while <strong>AUDJPY</strong> traded softer after the cross peaked at a three-week high yesterday. The <strong>Nikkei 225</strong> hit a six-month high, which followed a strong close on Wall Street yesterday, with the <strong>S&amp;P 500</strong> finishing just a whisker below a record closing peak. European stocks have opened lower with <strong>GER30</strong> holding over 13,000 at <span><strong>13,025</strong></span> and the <strong>UK100</strong> trades down around <strong><span>6,200</span></strong>. <strong>AUDUSD</strong> edged out a two-day peak at <span><strong>0.7188</strong></span>. Australian July employment data showed a forecast-smashing 114,700 rise in the headline, while the June figure was revised higher, though lockdowns across the country are now blighting the immediate outlook. <strong>USDCAD</strong> settled just above Wednesday’s six-month low at <span><strong>1.3227</strong></span>.</p>
<p><a href="https://analysis.hotforex.com/wp-content/uploads/2020/08/2020-08-13_12-17-34.png"><img class=" wp-image-159694 aligncenter" src="https://analysis.hotforex.com/wp-content/uploads/2020/08/2020-08-13_12-17-34-300×138.png" alt="" width="663" height="305" srcset="/wp-content/uploads/2020/08/2020-08-13_12-17-34-300×138.png 300w, /wp-content/uploads/2020/08/2020-08-13_12-17-34-1024×471.png 1024w, /wp-content/uploads/2020/08/2020-08-13_12-17-34-768×353.png 768w, /wp-content/uploads/2020/08/2020-08-13_12-17-34-696×320.png 696w, /wp-content/uploads/2020/08/2020-08-13_12-17-34-1068×491.png 1068w, /wp-content/uploads/2020/08/2020-08-13_12-17-34-913×420.png 913w, /wp-content/uploads/2020/08/2020-08-13_12-17-34.png 1181w" sizes="(max-width: 663px) 100vw, 663px" /></a></p>
<p><strong>Sterling</strong> is trading mixed, edging out a two-day high at <span><strong>1.3092</strong></span> against the Dollar, while also gaining on the Yen and Aussie Dollar, but holding steady-to-softer versus the Euro and some other currencies. Yesterday’s preliminary UK Q2 GDP data showed a gargantuan 20.4% q/q contraction to confirm the technical definition of recession following Q1’s 2.2% shrink. The data wasn’t a surprise given the lockdown that was in place to varying degrees throughout the quarter. June GDP rose by 8.7% m/m, however, with June production data showing a robust rebound and beating expectations in the main headline readings, while high frequency data and a myriad of anecdotal evidence point to a strong rebound in the current quarter. The government’s furlough scheme has greatly limited the impact on the employment market. We have been talking down the Pound, to a degree, having seen limited scope for the currency to sustain its recent patch of outperformance. The BoE last week delivered a warily-upbeat outlook, though with localized lockdowns and most media doing their utmost to maintain maximum fear of a second wave of coronavirus infections, we take a circumspect view of the outlook over the coming months, anticipating a plateauing in economic rebound momentum. Manchester, Preston, Bradford and Aberdeen are back in lockdown and there is a number of new travel restrictions with other countries. The furlough scheme will end in late October, which is likely to trigger a wave of job losses, particularly in the airline, retail and hospitality sectors.</p>
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<p><strong>Stuart Cowell</strong></p>
<p><strong>Head Market Analyst</strong></p>
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