GBP/EUR: Pound Snaps 3 Day Winning Streak vs. Euro

The risk-on mood waned in the Forex markets later today in the Asia-Pacific session as the trade-sensitive Australian Dollar fell 0.3 Percent. In contrast, the haven-linked US Dollar and Japanese Yen rebounded. But, the Asian equity markets were up with Japan’s Nikkei 225 index climbing 1.22 Percent, and Australia’s ASX 200 inched up by 0.3 Percent.

Italian second-quarter GDP and German inflation data for August are expected today.

FED AIT Increase the USD Bearish Pressure

Federal Reserve Chairman Jerome Powell’s announcement of the adoption of average inflation targeting by the US central bank would weigh on the US dollar in the coming days. The Fed’s modification in its inflation approach allows the Federal Open Market Committee to run inflation above two Percent for some time if the inflation stays below the target-rate for a period.

The European Central Bank pursues a less dovish approach to the inflation rate expecting to keep it “below, but close to, 2 Percent.” President Christine Lagarde and her team thus enjoy less freedom than their US counterparts while adopting a dovish approach.

Nevertheless, both central banks are willing to pursue more action to stimulate growth. ECB Chief Economist Philip Lane during the Fed’s annual Jackson Hole symposium said that the bank was ready to adjust all instruments as appropriate.

Yet, the more freedom enjoyed by the US policymakers could support EUR/ USD before the ECB interest rate decision on September 10.

EU Recovery Threatened By COVID -19 Second Wave

The bullishness in the Euro might get checked by the rising number of coronavirus cases worries local governments. The second wave of infections might force them to impose economically devastating restrictions.

The University of Oxford’s Government Response Stringency Index indicates the increased restrictions in Germany, Italy and Spain since July-end. France chose not to impose restrictions despite a steep rise in infections and there were 7,379 new cases in France on Friday, the single largest daily increase since March 31.

Although French President Emmanuel sounded confident in his country’s ability to tackle the pandemic, he didn’t rule out a nation-wide lockdown if the virus infections take an unexpected turn.

The health concerns are likely to take centre stage instead of the upcoming economic data. If Europe is forced to impose severe restrictions, the Euro might underperform against the haven-linked US Dollar and Swiss Franc.