GBP, EUR, and USD Battle it Out.

• GBP/USD Strength: GBP/USD rebounded strongly, driven by contrasting monetary policies and robust UK economic data, which tempered expectations of a BoE rate cut.
• UK Economic Highlights: UK inflation rose to 2.2%, while unemployment dropped to 4.2%, both surpassing forecasts, and Retail Sales rebounded in July, supporting the Pound.
• EUR/USD Momentum: The Euro broke significant resistance, potentially signaling a rally toward last December’s highs, as the US Dollar weakened on disinflation expectations.
• USD Weakness: The US Dollar Index dropped to its lowest since January, pressured by declining Treasury yields and anticipation of a Fed rate cut in September.
• Fed Watch: Investors are focused on upcoming Fed communications, particularly the FOMC minutes and Jerome Powell’s speech, as markets brace for a possible rate cut.

GBP: GBP/USD surged this week, driven by risk appetite and contrasting monetary policies between the US Federal Reserve (Fed) and the Bank of England (BoE). Economic data releases from both countries highlighted differing central bank approaches. Early in the week, strong UK employment and hot Consumer Price Index (CPI) data tempered expectations of a BoE rate cut in September. UK inflation rose to 2.2%, slightly below the forecast of 2.3%, but above the BoE’s 2.0% target. UK employment data surprised positively, with the Unemployment Rate dropping to 4.2% from 4.4%, defying expectations of an increase to 4.5%, largely due to a rise in part-time jobs. Additionally, UK Retail Sales rebounded by 0.5% in July after a 1.2% drop in June, aligning with market forecasts. Core Retail Sales, excluding auto motor fuel, rose 0.7% MoM, though slightly softer than expected. Conversely, robust US Retail Sales and Jobless Claims data, coupled with moderate inflation, suggested a potential Fed rate cut in September. US Retail Sales jumped 1% MoM, far exceeding the anticipated 0.3% increase, while Initial Jobless Claims fell to 227,000, beating estimates of 235,000.

EUR: The Euro-Dollar exchange rate broke through significant resistance, hinting at a potential rally toward last December’s high of 1.1140 and possibly beyond. The Euro’s strength came as the US Dollar weakened following US producer and consumer price data, which hinted at further disinflation. This development has bolstered market confidence that the Fed might cut rates by up to 100 basis points by year-end, diminishing the Dollar’s interest rate advantage. “Despite the mid-week pullback from near 1.1050, the overall trend remains bullish for the Euro,” noted Shaun Osborne, Chief FX Strategist at Scotiabank, in a Friday market commentary.

USD: The US Dollar (USD) started the week under selling pressure, with the USD Index hitting its lowest level since early January, near 102.00. With no high-impact data on the horizon, investors are closely monitoring central bank commentary. The USD Index dropped over 0.5% on Friday, marking its fifth consecutive week of losses. A stronger risk appetite and declining US Treasury yields have weighed on the Dollar. On Monday, the 10-year US yield remained below 3.9%, and US stock index futures were relatively flat. Fed communication will be key this week, beginning with remarks from Christopher Waller. Wednesday brings the release of the FOMC minutes from July, while Friday will see Fed Chair Jerome Powell’s address at the Jackson Hole symposium. Additionally, revisions to the payrolls report on Wednesday could see downward adjustments to job gains from March 2024. While some argue that the Dollar’s sell-off may be nearing an end, the Fed’s rate cut cycle has yet to begin, and softer US data could lead to more accommodative Fed rates being priced in. Despite last week’s strong July retail sales, Dollar gains have been short-lived, and current weakness suggests a broader decline ahead of the anticipated Fed rate cut on September 18. Today, all eyes are on Waller’s remarks to see if the USD Index can dip below 101.75, potentially setting up a move to 101.00.