Another day, another strong dollar

Dollar maintains its ascent against the pound, growing concerns around inflation, and Reserve Bank of Australia rate release.

Sterling bulls may have felt optimistic yesterday morning, as the avoidance of a US government shut down and stronger than expected PMI data from China hinted at an upbeat session.

Alas, not the case, the dollar maintained its July ascent against the pound and a basket of currencies. The ISM Manufacturing data was always going to be heavily scrutinised as investors look for confirmation that the US economy remains robust despite the high interest rate environment.

A stronger than expected figure, nearing growth territory in the sector allowed the dollar to appreciate against the pound. The trend was then compounded as Federal Reserve Governor

Michelle Bowman, stated “I remain willing to support raising the federal funds rate at a future meeting if the incoming data indicates that progress on inflation has stalled or is too slow to bring inflation to 2% in a timely way”.

In order to buck that trend, a positive UK Services print on Wednesday, and a softer than expected US labour data, JOLTS (Job Openings and Labour Turnover) today and particularly the Non-Farm Payroll number on Friday may be crucial in allowing GBPUSD to close the week above $1.2000.

Inflation concerns continue to grow

Helen Dickson, the British Retail Consortium Chief Executive mentioned that whilst the YoY shop price inflation fell overnight to 6.2%, while the UK observed the first monthly drop in food prices for two years. There are risks to the falling inflation trend; climbing oil prices, sugar shortages and continued supply chain disruption due to the war in Ukraine.

Echoing inflation concerns was the ECB’s Phillip Lane, mentioning that food price increases are still a substantial issue and services inflation remains sticky. Reducing inflation to the 2% target will not be achieved in the same timeframe as the move to 4%, particularly as he expects gas prices to rise moving into the winter months.

At this point little more needs to be said about the prospect of sticky inflation and longer periods of high interest rates.