Currency outlook: US dollar soars as risk-off mood prevails, Pound fluctuates on mixed UK data and coronavirus developments

Sterling strengthened at the end of July, climbing to a 3-month high against the euro.

Sterling strengthened at the end of July, climbing to a 3-month high against the euro.

EUR/GBP: Unchanged at £0.85
EUR/USD: Down from $1.17 to $1.16

Throughout the past month the direction of the euro has been largely determined by its strong negative correlation with the US dollar.

This has resulted in some notable pressure on the single currency in August amid broad support for the US Dollar.

However, the euro has been able to temper its losses in light of some positive EUR data releases, as well as optimism over the EU’s vaccine rollout, which has now reached over 70% of adults in Europe.

Looking ahead, the European Central Bank’s (ECB) upcoming policy meeting is likely to be a key focus for EUR investors. Expect to see the euro falter if the ECB maintains its current dovish bias.

GBP/EUR: Unchanged at €1.16
GBP/USD: Down from $1.37 to $1.36

The pound has traded in a wide range over the past month, in response to mixed coronavirus headlines and uneven UK data releases.

Sterling strengthened at the end of July, climbing to a three-month high against the euro on the back of positive UK coronavirus statistics.

This upside was reinforced in the first week of August, following some surprisingly hawkish forward guidance from the Bank of England (BoE), in which it suggested ‘some modest tightening of monetary policy’ may be necessary if the UK economic recovery maintains its current pace.

However, the pound subsequently relinquished all of these gains in the second half of August, plunging to a one-month low amidst a worrying rise in domestic coronavirus cases as well as some disappointing data releases, which prompted GBP investors to dial back their BoE expectations.

Looking ahead, GBP exchange rates could face some additional headwinds through the coming month if UK coronavirus cases continue to climb, while concerns over the winding down of the government’s furlough scheme could also weigh on Sterling sentiment.

US Dollar
USD/GBP: Up from £0.72 to £0.73
USD/EUR: Up from €0.84 to €0.85

Apart from closing July on the defensive in response to a dovish rate decision by the Federal Reserve, the US dollar has broadly strengthened over the past four weeks, amidst a souring market mood.

This deterioration of market sentiment has been primarily driven by a sharp rise in coronavirus cases in many parts of the world, which has dampened global growth prospects.

However, this risk-off trend accelerated sharply in mid-August following the publication of the minutes from the Fed’s July policy meeting, which revealed the Fed has begun formal discussions regarding the tapering of its bond purchases.

The prospect of the US central bank withdrawing its stimulus at the same time that the global recovery looks to be faltering, spooked investors and redoubled demand for the safe-haven US dollar.

Looking ahead, the immediate focus for USD investors will be the Fed’s annual Jackson Hole symposium, in which they will be looking for more clarity over the Fed’s tapering plans.

Otherwise, it’s likely we will see the US dollar maintain its upward momentum into September, assuming the risk-off mood remains entrenched.

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