The US Dollar came under sustained pressure this week, helping GBP/USD climb to its highest level since February and pushing GBP/AED as high as 5.0200. As the UAE Dirham is pegged to the Dollar, any broad weakness in the US currency is usually reflected directly in the GBP/AED exchange rate.
The main catalyst was an announcement from the US Treasury that it would at least double the size of its buybacks of longer-dated government bonds from September. Although the stated aim is to improve liquidity in the Treasury market, investors interpreted the move as an attempt to bring rising long-term borrowing costs under control. It also drew renewed attention to the size of America’s debt burden and raised further questions about confidence in US fiscal policy.
At the same time, markets became less convinced that the Federal Reserve would raise interest rates again. The combination of softer rate expectations, concerns surrounding US government debt and a broader move away from Dollar-denominated assets sent the currency lower across the board.
UK economic data disappointed overall last week, particularly after retail sales ended the week on a weak note. Although this has not been reflected against the struggling US Dollar, Sterling has lost some ground against the Euro and several other major currencies.
As we enter the final week of August, and effectively the end of the summer period, there are still several noteworthy releases to navigate before more regular market liquidity returns in September.
The week begins in the early hours of Tuesday morning with the minutes from the Reserve Bank of Australia’s latest meeting. These will be particularly interesting following its recent decision to leave interest rates unchanged, with markets looking for any clues about what could prompt its next move.
Attention then turns to the US, where we have the latest weekly ADP employment estimate, house price data, new home sales and consumer confidence. The ADP release will provide another timely indication of whether the US labour market is continuing to lose momentum.
Wednesday is heavily focused on the United States. Core PCE inflation, the Federal Reserve’s preferred measure of inflation, will be released alongside durable goods orders and the second estimate of US GDP.
The initial estimate showed that the US economy grew at an annualised rate of just 1.5% during the second quarter, down from 2.1% in the first quarter. Wednesday’s figure will tell us whether that slowdown was more or less severe than first reported. A downward revision, particularly alongside softer inflation or durable goods data, could place the Dollar under further pressure. However, stronger figures could revive expectations of another Federal Reserve rate rise and allow the Dollar to recover some of its recent losses.
Thursday marks the beginning of the annual Jackson Hole Economic Policy Symposium. Hosted by the Federal Reserve Bank of Kansas City, the event brings together central bankers, economists and policymakers from around the world to discuss the major issues facing the global economy.
Jackson Hole is important because central bank leaders have historically used it to signal significant changes in monetary policy. Markets will therefore pay close attention to speeches and comments concerning inflation, economic growth and the future path of interest rates.
This year’s event carries even greater significance because markets are looking for greater clarity from Federal Reserve Chair Kevin Warsh following the Fed’s move away from traditional forward guidance. Any suggestion that US interest rates could rise again may help the Dollar recover, while a more cautious tone regarding growth or inflation could extend its recent decline.
GBP/EUR 1.1672 GBP/USD 1.3621 GBP/AED 5.0046
GBP/AUD 1.9024 GBP/CHF 1.0930 GBP/CAD 1.8856
GBP/NZD 2.2843 EUR/USD 1.1654 GBP/ZAR 21.8144