News & analysis


Sterling saw high volatility against the US dollar, like most major currencies, during Jerome Powell’s speech yesterday afternoon, and has since participated in the rally most major currencies have enjoyed against the greenback. GBPEUR is flat compared to yesterday morning. There was no top-tier UK data yesterday, although the Government will reportedly launch an initiative to encourage workers to return to offices. Advertisements in local media will reportedly urge employers to reassure staff that it is safe to return to offices, and comes as schools reopen next week. Bank of England Governor Andrew Bailey will speak at the Federal Reserve’s virtual symposium today at 14:05 BST.


The euro was out of the spotlight again yesterday as markets focussed on the historic changes to Fed policy ushered in by Jerome Powell’s speech, but the single currency did see high volatility in the afternoon and has appreciated against the dollar overnight. Money supply data released yesterday showed headline M3 money supply in the eurozone surging by 10% year on year, consistent with the European Central Bank’s massive asset purchase programmes. The ECB’s chief economist Philip Lane participated in a panel discussion yesterday, and said that although the ECB had been successful in stabilising markets after the volatility seen in March, the Bank cannot be complacent in reaching its inflation target. This morning’s data has included a contraction in German GFK consumer sentiment, as well as a 0.1% contraction in French consumer prices in July.


Jerome Powell used his speech at this year’s virtual Federal Reserve Symposium to announce a historic change in the central bank’s monetary policy strategy, causing volatility in the dollar during the speech that turned into another wave of weakness overnight and this morning. Two major changes to the Fed’s Statement on Longer-Run Goals and Monetary Policy Strategy. Under the new framework, the FOMC will respond to “shortfalls” in employment relative to its theoretical “maximum level”, and instead of targeting an inflation rate of 2%, it will seek to have inflation average 2% over time. In practice, this means that after a long period of inflation undershooting the target – as it has for most of the past decade – the FOMC will be less concerned about upside risk. Powell elaborated on the significance of the move away from using maximum employment as a policy variable in his speech. The Fed chair explained that high uncertainty about estimates of maximum employment and asymmetric risks at the lower bound of policy meant that the FOMC would be less concerned about an overheated labour market, unless it was accompanied by signs of an inflationary overshoot. The changes add up to a structural change in the Fed’s reaction function that will mean lower interest rates for longer, and in turn less impetus for US dollar appreciation in economic upswings. Yesterday’s data included a slight upwards revision to second quarter gross domestic product, and a fall in weekly initial jobless claims to just over one million. Personal spending and income data will be released today at 13:30 BST.


The loone has continued to appreciate against the US dollar, reaching its strongest levels since January against the greenback this morning. Bank of Canada Governor Tiff Macklem gave a speech at the US Federal Reserve’s virtual symposium yesterday, and called for a “sea change” in central bank communications. Macklem emphasised the importance of keeping inflation expectations anchored, echoing the emphasis placed on them by the Federal Reserve earlier in the day and describing the pandemic as a “huge disinflationary shock”. As if to support Macklem’s point, monthly gross domestic product figures will be released today at 13:30 BST.



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