Covid resurgence bolsters USD, EUR spikes briefly as inflation target alters

LOOKING AHEAD: The pound could face an uphill battle in August.

CURRENCY OUTLOOK: Coronavirus resurgence bolsters US Dollar and Euro sees brief spike after ECB alters inflation target.

EUR/GBP: Unchanged at £0.85
EUR/USD: Down from $1.19 to $1.17

The euro has faced some headwinds this month, as a notable pickup in the US dollar has weighed on the single currency as a result of the strong negative correlation between the pairing.

The euro did enjoy a brief spike after the European Central Bank (ECB) adopted a new inflation target, a move which was deemed to have bolstered its credibility.

However, the ECB’s latest rate decision proved to be less supportive of EUR exchange rates, with the euro retreating after the bank signalled that interest rates are likely to remain on hold for quite some time yet.

Looking ahead, a resurgence of coronavirus cases in Europe could act as a headwind for the euro in the coming weeks, and offset the support of some positive EUR data releases.

GBP/EUR: Unchanged at €1.16
GBP/USD: Down from $1.38 to $1.37

The pound has traded in a wide range over the past four weeks, mostly as a result of mixed coronavirus developments in the UK.

While Sterling sentiment was initially buoyed by the government’s decision to lift all remaining restrictions in England, this has becoming increasingly undermined by an alarming rise in domestic coronavirus cases.

This resulted in the pound plummeting in the second half of July as GBP investors began to question the sustainability of the reopening.

Also infusing some volatility in Sterling has been some conflicting messages from within the Bank of England (BoE), in regards to whether the bank should look towards tapering its stimulus programme in the coming months.

Looking ahead, we could see the pound face an uphill battle in August if UK coronavirus infections continue to surge at a worrying pace, while the BoE’s next rate decision will be closely watched by GBP investors seeking more clarity on the bank’s policy outlook.

US Dollar
USD/GBP: Up from £0.71 to £0.72
USD/EUR: Up from €0.83 to €0.84

The US dollar enjoyed broad support throughout much of July, as souring market sentiment prompted investors to favour the safe-haven ‘greenback’.

This came amidst a resurgence of coronavirus cases in many parts of the world and the resulting uncertainty over the global economic recovery.

Also helping to reinforce the upside in USD exchange rates this month was the latest US consumer price index, which reported inflation rocketed up to 5.4 per cent in June and reignited speculation over the tapering of the Federal Reserve’s stimulus programme.

However, it wasn’t all smooth sailing for the US dollar, as a dovish statement from Fed Chair Jerome Powell as he testified before Congress quashed some of this speculation.

Going forward, with the Delta variant still ravaging much of the world, the US dollar is likely to maintain its positive trajectory in the coming weeks, although an underwhelming payroll report could act as a speedbump for the ‘greenback’.

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