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Dollar on front foot as Sterling struggles

The U.S. dollar opened the week at a two-month high, after better than expected GDP data print on Friday.

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The U.S. dollar opened the week at a two-month high, after better than expected GDP data print on Friday. U.S. gross domestic product increased at an annualised rate of 2.1% in the second quarter, above forecast of 1.8%, with consumer spending filling some of the void caused by a decline in exports. This data pushed up U.S. bond yields and cemented expectations that the Fed will go for a smaller interest rate cut of 25 basis points when they meet later this week.

Futures markets are now pricing in a total cut of 75 basis points by the end of the year, which given the change to monetary policy by other central banks, would still leave the U.S. with the highest interest rates of most currencies. The Fed’s policy meeting is this Wednesday and is seen as a major risk event.

The European Central Bank (ECB) stated last week that they were prepared to cut interest rates, pushing an already negative rate lower still, whilst a series of easing measures may be introduced as early as September. This is seen as a reaction to an economy that has sagged of late, with key components such as German manufacturing output declining at its fastest rate for seven years alongside soft eurozone PMI and German IFO data.

In the UK, the appointment of Boris Johnson as the new Prime Minister has done little to change the fortunes of the pound which continues to struggle. EU officials commented last week that there would be no re-negotiation of the withdrawal agreement, causing many in Westminster to assume the UK will be leaving the EU without a deal in October.

Subsequently sterling continues to underperform, with levels against the dollar sat just beneath a 28-month low and pushing down on the 1.11 handle against the euro.

The focus this week will be the Bank of England (BoE) inflation report, interest rate decision and accompanying statement this Thursday. It is not expected that the BoE will cut rates, however any change in the rhetoric from the bank will be scrutinised to determine future policy.

Data today is relatively thin, with this week’s focus on the two central banks meetings.

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