GBP/USD: UK Inflation To Drive The Pound Higher vs Dollar?

Risk on trading in the Asian session saw safe haven JPY and USD decline versus major peers.
Inaction from the ECB could support the Euro, dragging on the USD .
DXY creating bear flag pattern at key support. Could the greenback come under further pressure?

The perceived risky Australian Dollar trended higher in the Asian session whilst safe havens  Japanese Yen and US Dollar slipped southwards against major peers, even though the US Senate ruled out additional fiscal  stimulus being agreed to prior to the November elections.

The Australian ASX 200 declined. The Japanese Nikkei 225 advanced 0.74%.

Gold and silver fell lower  US 10-year Treasury yields pulled back sub 0.69%.

Coming up, US inflation data could provide some directional impetus ahead of next week’s FOMC monetary policy decision.

ECB To Spark DXY Selloff?

The European Central Bank left monetary policy unchanged. This could support the Euro  in the short-term versus the US Dollar – potentially sending the Dollar Index (DXY) back towards its yearly low (EUR accounts for over 57% of DXY Index (DXY).

ECB President Christine Lagarde acknowledged  Chief Economist Philip Lane’s concerns over recent Euro strength. However, she didn’t talk down the Euro, instead reminding that “our mandate is price stability”. She added that the central bank will “monitor carefully” given the negative pressure on prices that a strong Euro brings..

Her comments indicate that not all policy makers are worried about the value of the Euro and it’s 12% rally against the greenback since the end of March. Even though Christine Lagarde reconfirmed the ECB’s “accommodative monetary policy stance” any additional stimulus measures appear to be off the table at least in the near term.

Will the central bank will maintain the status quo in the coming months? It is too early to tell given the uncertainties surrounding the strength of the recovery and success in containing coronavirus.

Lagarde’s message that the ECB “does not target the exchange rate” is expected to underpin the common currency across the coming weeks and  potentially dampen demand  for the US Dollar Index.

Congressional Deadlock To Direct The Fed

The Federal Reserve’s monetary policy meeting, the Open Market Committee (FOMC) on September 16 could also pressurise the US Dollar versus it’s major peers, as the Fed will also release the updated Summary of Economic Projections (SEP).

The Fed’s balance sheet has steadied since peaking on at $7.17 trillion on June 10. However, the central bank’s shift to average inflation targeting (AIT) points to the Fed expanding its quantitative easing program as 5-year inflation expectations show signs of running out of steam around1.6%.

In light of Federal Reserve Chairman Jerome Powell’s comments that “well-anchored inflation expectations are critical for giving the Fed the latitude to support employment when necessary” the chances of the Fed sticking with the status quo seem relatively low.

Let’s not forget with initial and continuing jobless claims still coming in worse than expected and Congress failing to agree to additional fiscal stimulus, market participants could be hoping that the Fed will pick up the pieces in order to achieve its dual mandate “maximum employment and price stability goals”.

Continuing jobless claims (week ending August 29) rose to 13.38 million, above the 13.29 million claims forecast. Meanwhile, initial jobless claims remained unchanged at 884,000.

Therefore. the US Dollar Index could continue to trend southwards from the yearly high struck in March, if Congress agrees another rescue package.