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Daily Currency Update

Sterling rebounded from 11-month lows to gain over half a percent versus the euro on Wednesday on speculation the European Central Bank might not tolerate a strengthening single currency for too long.

Focus remains on euro area inflation in August. Yesterday’s German and Spanish figures were both higher than expected but the upside surprise was driven mainly by energy price inflation and the higher inflation should not alter the ECB’s current view on its monetary policy strategy.

Euro area and German unemployment rate figures are also due for release today. Both figures have declined over the past years and the German unemployment rate is very low in a historical perspective. This has been one factor supporting consumer sentiment, which is at the highest level in more than 15 years. The ongoing strong economic situation in Germany bodes well for Angela Merkel in the upcoming election.

US inflation figures will attract attention in the afternoon with the release of the PCE figure. The decline in PCE core inflation in the first half of this year has sparked some concern about lack of inflation pressure within the Fed.

Nevertheless, the Fed has said quantitative tightening will begin ‘relatively soon’ and we expect it to be announced in September.

The U.S. dollar continued its recovery from a 2.5-year low on Tuesday, supported by U.S. economic data which surpassed economists’ expectations.

With a GDP growth at 3% the U.S. economy grew at its fastest pace in more than two years, while ADP employment data showed private-sector payrolls up by 237 thousand compared to the expectations of only 185 thousand.

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