EUR/USD already on track for worst weekly performance since March

The dollar seemingly struck a short-term bottom on Friday, with the USD recovery extending this morning. This has been most apparent against the euro, which continues to retreat from a multi-year high. By moving solidly back below the 1.20 handle, markets are calling into question whether the greenback sell-off has been overdone and if the dollar will see more sustained gains in the coming weeks. The rise in the US currency can’t only be based on economic progress however; even if inflation figures tomorrow and Thursday behave well, gains must be made in the political arena too, and Treasury Secretary Steve Mnuchin has been speaking on just that this morning.

Mnuchin again talked up the prospect of more competitive corporation taxes in the US, but his reluctance to commit to a specific target percentage may frustrate critics and, if he’s not careful, markets too. However, in a further sign of bipartisan progress, Mnuchin also hinted that the Republicans would be working closely with the Democrats on an infrastructure-led plan focused on job creation – something that will have aided the buoyant value of the dollar this morning.

Inflation spike in the UK likely to push real wages further into negative territory

Petrol prices came back to bite in the UK: after two months of stagnant energy costs, weather disruption in the Gulf of Mexico twinned with geopolitical tensions on the Korean peninsula have lit a fire under commodity prices – becoming the main contributor toward August’s jump in both UK inflation rates. Import costs also leapt, rising for the first time in six months as the GBP/EUR exchange rate continues to punish UK importers.

Whether higher energy costs are sustained or not won’t trouble the Bank of England, but today’s rise in core inflation will. Core CPI, which strips out the volatile effects of energy and food costs, touched 2.7% and the highest level since late 2011, leaving Mark Carney and the MPC under pressure to raise borrowing costs. Nonetheless, the Bank’s internal forecasts have proved markedly prescient and see inflation rising further to hit 3% in October before easing into the end of the year. As such, calls for interest rates hikes are still premature and the Bank of England will treat them as such on Thursday.

Sterling spiked higher upon release, touching 1.3260 against the dollar, marking a 10% recovery for the pair from the post-referendum lows back in October.

The day ahead

The calendar’s somewhat lighter for the rest of today’s session, but further estimates of the cost to GDP from hurricanes Harvey and Irma in the coming quarters are getting a fair amount of airplay. While the immediate halt and interruption to businesses across the regions affected will be economically destructive, an uptick in repair, reconstruction and rescue spending will do much to combat these effects. Most estimates see there being a minor headwind of 1% or so to GDP before the end of 2017, enough to temper US economic growth, but certainly not enough to derail it.

Have a great day