Volatile end/start of week for dollar

It was a volatile day on Friday for the dollar. Its recent rally ran out of steam and it lost ground against both the euro and sterling, back to circa. $1.0740 and over $1.25. However, very late on, the greenback surged back and retook all of its losses and ended the week at $1.07 and $1.2470. This morning, however, the dollar is losing ground again and the euro is back up towards that $1.0740 level and sterling has pushed again through $1.25. Through this all, EUR/STG cross remains relatively little changed, remaining trading in the 0.85p range all week, and this morning is up around 85.7p.

Equities markets generally pulled back last week but managed a good session on Friday on both sides of the Atlantic with S&P 500 up 0.1% for the day (but down over 1% for the week), and the Eurostoxx gained 0.4% on Friday while the FTSE also rose, up 0.5%. Perhaps supporting the late dollar rally, oil again ticked upwards on Friday with a barrel of Brent crude at a fresh 2023 high, back above $90.

Consumer spending in the US has been resilient despite heightened, though now slowing, inflation. However, there are some fears that this robust spending cannot be sustained in the face of much higher interest rates. Consumer credit in July rose by much less than expected, up $10.4bn, much less than the $16bn consensus forecast. Much of this was on credit card borrowing, which households may be turning more too as savings shrink but is less sustainable in this higher rate environment. Also putting households under stress is the imminent resumption of student loans – which has been suspended for 3 years as a COVID measure – and that will cut many US households disposable income going forward.

The ECB Governing Council meets this week with the outcome very much finely balanced and the outcome is not clear to markets. The minutes from the last meeting showed that participants were concerned about the rising risks of stagflation – little growth and suborn inflation – and that any future rates decision would be data dependent. Since then, we have had both hard data that shows little growth in major European countries in Q2 and indicator data that shows that weakness continuing in Q3 but also inflation data which shows sticky core inflation and rising oil prices which may re-ignite headline inflation in the short term. Much of the previous rate increases have yet to feed through to the real economy which is already weak but, on the other hand, inflation is still more than double the target rate. Markets, on balance, seem to think the ECB will pause this week and wait for further data, but some ECB hawks are pressing to keep hiking, with Dutch Central Bank President Knot saying last week that markets ‘maybe underestimating’ the chances of another 25bps rate hike this week and the decision is a ‘close call’.

Main event this week, will be that ECB meeting on Thursday. The main data today is also Eurocentric with the latest EU Commission forecast due this morning.