Foreign exchange forecasts this week: Eyes on the dollar but sterling vulnerable too, says Bibby FS

Tue 28 Jul 2020
Posted by: Noelle McElhatton

All eyes this week are on the woes besetting the dollar – the world’s reserve currency is at a two-year low – but exporters also need to be watchful of sterling, Bibby Financial Services tells Daily Update readers in its weekly blog:

Today (Tuesday 28 July) the US dollar began to recover from a two-year low ahead of a Federal Reserve meeting starting later today, with debate deadlocked over the size of a US fiscal rescue package.

The US dollar basket (DXY) has touched lows seen nearly two years ago as sellers continue to control price action ahead of this Wednesday’s Federal Open Market Committee (FOMC) meeting.

Covid-19 caution

The Fed is likely to continue its dovish rhetoric and actions, as renewed Covid-19 outbreaks in the US make an economic recovery harder to call.

The US government is preparing another round of direct stimulus with a further $1,200 cheque for every American taxpayer expected to be signed off soon, in a further effort to boost the economy.

With some 30 million Americans out of work, Republicans and Democrats disagree on how big the overall stimulus should be, with the Democrats arguing for $3tr and the Republicans a mere third of that.

On Wednesday, the Fed is expected to signal that it remains willing and able to provide the economy with as much liquidity as is required, an action that will cause the greenback to weaken further against a range of currencies.

Sterling’s issues

Sterling hit a four-month high against the dollar on Monday, though the UK currency is expected to underperform many of its European peers in the immediate future.

The cause is the continuing lack of progress on a free trade deal between the UK and the EU.

Informal trade talks are happening this week, with compromise needed on key issues including fisheries and state aid.

While both negotiators are playing a blame game, the mood music has picked up in the last couple of weeks with some political commentators seeing an improvement in optimism around the talks, albeit marginal.

Sterling remains vulnerable to a sell-off if both parties remain at an impasse, suggesting that cable may not be fully pricing-in any bad news.

Economic data  

There is little significant economic data due out in the UK this week, with mortgage approvals the only release of note.

However, there are announcements due from other countries that could affect exchange rates:

On Wednesday 29 July

German import prices

UK mortgage lending and approvals

FOMC meeting and US rate decision

Thursday 30 July

Europe unemployment rate and sentiment figures

US GDP and Jobless claims

Friday 31 July

Europe GDP and inflation rates

US personal spending and core PCE price index