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US dollar rebounds from two-week low amid growth concerns

The pound fluctuated through last week’s session, experiencing volatility in response to the latest Brexit developments and some mixed data.

At the same time, after initially tumbling to a fresh two-year low, the US dollar mounted a convincing recovery as jitters over global growth buoyed the appeal of the safe-haven currency.

Sterling, meanwhile, opens this week on stronger footing, with GBP/EUR ticking up to €1.11, while GBP/USD rallies to US$1.31.

Looking to the week ahead, the Federal Reserve’s Jackson Hole symposium looks to be the main catalyst of movement in currency markets this week, as investors look for more insight into how the Fed plans to support the US economic recovery.

The pound traded in a wide range last week as the currency was rocked by fresh Brexit jitters and concerns over the underlying strength of the UK economy.

Sterling initially got off to a solid start last week, rallying in upbeat trade and supported by optimism from Downing Street on the possibility of reaching a trade deal with the EU next month.

However, the pound’s rally quickly sputtered out following the publication of the UK’s consumer price index. While UK inflation soared back to 1% in July, many analysts expressed their scepticism that this could be maintained long-term.

A second attempt to rally in the latter half of the week was cut short again as the latest round of Brexit talks came to a close.

These showed that the UK and EU remain deadlocked over the terms of a post-Brexit trade deal, with GBP investors particularly unnerved by EU chief negotiator Michel Barnier’s suggestion that a deal ‘seems unlikely’ at this stage.

Further dragging on Sterling sentiment were the UK’s latest PMIs, as while the headline figures printed positively, GBP investors were dismayed as the survey’s highlighted the accelerating pace of job cuts.

Turning to this week, lingering Brexit jitters may continue to limit upside in GBP exchange rates amid growing fears the UK is facing a no-deal Brexit at the end of 2020.

Elsewhere the focus looks to be on a speech by Bank of England (BoE) Governor Andrew Bailey scheduled for the end of the week.

Bailey’s remarks are likely to be closely scrutinised by GBP investors, who will be looking for any hints from the Governor that the BoE is putting serious consideration into negative interest rates.

Euro struggles on coronavirus resurgence

The euro was offered some support after the latest German GDP data revealed the country’s recession was not as deep as previously forecast. However, the quarter-on-quarter contraction of -9.7% and annual slump of -11.3% was the worst fall on record and considerably larger than the contraction seen during the financial crisis.

The euro was under pressure for much of last week as coronavirus cases increased across Europe, triggering fears that lockdowns may be reintroduced.

However, EUR made some gains this week after the latest German business climate index rose and showed the bloc’s largest economy was on track for a recovery after the coronavirus crisis.

The data from Ifo showed business climate in the bloc’s largest economy jumped to a higher-than-forecast 92.6.

The euro was also boosted after Ifo economist, Klaus Wohlrabe, said they expected GDP to surge by around 7% during the third quarter. However, he warned the economic rebound is still fragile.

The single currency made further gains this week on signs of a developing coronavirus treatment, which boosted market sentiment and offset fears sparked by a resurgence in coronavirus cases in Germany, France and Spain.

Meanwhile, last week saw the latest round of post-Brexit trade talks between the European Union and UK end with both sides stating they made little progress, and blaming each other for the current stalemate as the end-of-year deadline draws closer.

Looking ahead, the euro could benefit from several hawkish speeches from European Central Bank (ECB) policymakers this week.

Added to this, the single currency could edge higher at the end of the week if the latest GfK consumer confidence data reveals sentiment improved more than expected in Germany in September.

However, these gains could be limited if confidence in the bloc fails to improve in August due to the resurgence of cases across the Eurozone this month.

Meanwhile, at the end of the month the currency could extend any gains following the release of the latest German flash inflation data which is expected to edge higher in August.
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