Currency Update – Tuesday 17th August

Currency Update – Tuesday 17th August

After an exceptionally strong performance last week where there was not one day that the Dollar did not appreciate against the Euro, Sterling and Kiwi Dollar, the greenback has finally given up some of its recent gains, losing around a cent against both Sterling & the Euro. Despite the view from the window it seems that markets are truly in the dog days of summer, with consolidation seemingly the theme of trading this week. The selloff in any case was fairly modest, implying that investors remain nervous and are simply waiting for a another good reason to bail out of risky currencies. Indeed the fact that the Dollar was more heavily sold against the Swiss Franc and Japanese Yen confirms that investors are still seeking safety in lower yielding currencies, whilst the recent drop in US yields gives investors even less encouragement to hold dollar denominated assets.

USD/JPY, at its current 85 level, is approaching historic highs of Y79 against the Dollar that were set in 1995. Views regarding how far it can extend these gains are wide ranging – markets have to grapple with the opposing forces of possible further QE by the US, and intervention by the BoJ, with reports that PM Kan will meet BoJ Governor Shirakawa next Monday to discuss further monetary easing. Weak economic data from Tokyo yesterday heightened concerns over the global economy and further fuelled haven demand for the Japanese currency.

UK inflation should continue to decline in today’s consumer price inflation release, though the annual rate of inflation is only likely to slip 0.1pp to stand at 3.1%. Such a reading  would trigger an eighth letter from Governor King explaining why inflation has overshot the target by more than 1pp. In the coming months higher food and fuel prices raise the risk that we may not see inflation come down much more until later in the year, and then of  course it will rise back again in January with the 2.5pp VAT hike.

Chancellor Osborne is due to speak this afternoon on ‘Building an economy for the future’. With thin trading, this could move markets, if as we expect, there is some concentration on the need to improve the UK’s manufacturing base. That said, with the Chancellor also expected to dwell on fiscal consolidation, any dip in sterling is likely to prove temporary.

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