Published: 23/08/2022 By ECAPSterling held up slightly better than the euro yesterday, though it still sold-off by around half a percent on the dollar, falling to its lowest level since the start of the pandemic in the process. The universal expectation is that the UK’s cost of living crisis will get worse, before it gets better, and that has investors betting that a sharp slowdown in the economy is on the way. Business activity PMI data out of the major G3 economies is due today, which will provide an indication as to whether these growth concerns are feeding through to a deterioration in the soft data. Should they hold up better-than-expected, which we still think that they will, then we could see a bit of a retracement in recent safe-haven flows, which have left the US dollar at extraordinary strong levels.
The euro crashed back through parity against the US dollar once more yesterday, with ‘risk off’ trading and concerns over rising energy prices in Europe causing the common currency to be one of the worst performing major currencies in the world yesterday. Risk currencies were weaker across the board versus the broadly stronger US dollar, with signs of an easing in US inflation data would ordinarily be viewed as a dollar negative, although Fed speakers have continued to strike a hawkish tone in communications since the July inflation print. Richmond Federal Reserve President Thomas Barkin was the latest in the line of Fed members to stick to their guns on Friday, as he urged rate setters towards faster, front-loaded interest rate hikes. Market participants had expected an entirely justifiable softening in stance on rates from policymakers following the July CPI data, so the fact that this has yet to materialise had been bullish for the greenback.