The pound seems to have gotten off to a mixed start to the week as appetite from the currency markets continue to be driven by government policy around the globe.

Chancellor Rishi Sunak’s confident tones at the end of last week may have appeased investors for the short term, with speculation around the source of imminent tax rises to fund the prolonged stretch of public spending the key driver to sterling exchange, far outweighing any recent talk of monetary policy changes from the Bank of England.

It was interesting to see how little market reaction we saw last week after Governor of the Bank of England Andrew Bailey’s comments. Clearly investors are under no illusion that the BoE’s continued adjustments (equivalent to £450bn this year) in recent months are what have enabled the UK government to layout such a comprehensive increase in public spending.

Will GBPUSD Break Above 1.45?

Incidentally, since Sunak’s £30bn push last week, sterling increased by over 1% against the dollar highlighting the perceived value in committed public spending. It will be interesting to see if the trend is replicated in the weeks and months ahead as Bailey and Sunak combine in an attempt to keep the economy afloat. This morning’s UK GDP release could well inject further volatility into the markets ahead of tomorrow’s potentially pivotal inflation data. Particularly after yesterday’s concerns from event organisers across the UK that a further 30,000 jobs remain at risk within the parameters laid out by the government. Hitting just 1.8% against the expected 5% potentially reflects a slower than expected recovery curve, which could hault GBP’s prospects in the immediate future at least. Today’s trade data could also hold extra weight, particularly given the escalation of tensions between the UK and China after news that the government would look to exclude Chinese heavy weight Huawei from the UK’s 5g infrastructure.

European Central Bank to Announce Further Monetary Stimulus

As for Euro exchange rates, there seems to be plenty of opportunities for the single currency to break out of its rigid ranges against its major currency counterparts as the European Central Bank is due to set the scene for further monetary stimulus to help the bloc survive through the ongoing economic downturn.

In response to the European Commission’s revised summer forecast for 2020 with GDP falling to -8.7% from -7.7%, the European Central Bank will release its latest lending survey in which it will detail current lending conditions across EU members. With ECB president Christine Lagarde saying last week further stimulus could be used to drive pro-environment initiatives, the markets are beginning to question where the next show of support for the single currency might come from. As spring came to an end we saw the value of the euro jump on the back of French president Macron double down on his commitment for France to focus on renewable energies, it will be interesting to see if we see a similar trend here.

Importantly, Thursday sees the latest interest rate decision from the European Central Bank. After positive figures from Italy’s manufacturing sector, there is potential for further optimism in tomorrow’s inflation figures from Europe’s 4th largest economy. If this proves the case we could end up seeing a less cautious Lagarde which in turn could help the euro climb higher.

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US Dollar Continues to Slide on Election Uncertainty

As infection rates climb across key states (Arizona, California, Florida, Georgia and Texas), US dollar exchange rates have continued its slow, consistently falling from grace against its major currency counterparts. It appears the Greenback is beginning to struggle with the growing sense of uncertainty within the economy and the political implications this could entail. Question marks around President Trump’s position have been mounting in recent weeks with polls suggesting the likelihood of his re-election now sits at just 38% (RealClearPolitics). To add to this, Trump’s main opponent, former VP Biden, set his stance with a $700bn dollar economic recovery package as part of his promise to revive the economy, of which a substantial portion is designated to green research in a bid to draw further support.

US dollar holders will be hoping for a change in fortunes from this afternoon’s inflation readings despite the continued contraction in consumer spending. For this reason Thursday’s retail sales figures for the month June could hold extra weight with investors continue to hold out for further signs of resilience before committing further behind the dollar.

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