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U.S. Inflation Data Push Major Currencies Down

U.S. Inflation Data Push Major Currencies Down

Published: September 16th, 2020

 The euro fell on Friday, September 11, despite starting the day on a high. The decline was attributed to the U.S. core inflation data released the same day. The Great Britain pound, which had also recorded impressive gains in the morning trading as the euro, slumped despite the upbeat figures coming out of the U.K.

Both the pound and euro, which had splendid gains during the Friday, September 11, trading session, later plunged because of various reasons. The most significant cause of the slump is the U.S. inflation data, which market analysts said came in slightly higher than anticipated.

The Sterling pound has been struggling to break out of its limbo despite the positive data that the U.K. Treasury released. Overall, Great Britain’s forex market seemed to largely follow the domestic struggles presented by the Brexit trade row.

On the other hand, the U.S. market closed the week buoyant because of the expected gains that followed the now traditional market slump on Thursdays.

U.S. Core Inflation Data Impressive than Expected

The core inflation data released by the U.S. Bureau of Labor Statistics put the CPI inflation at 1.7%, 0.1% higher than expected. However, the data did not factor in the volatile food and energy prices.

The numbers are consistent with the trends. Inflation data has risen year on year and only dropping once in August from 0.6% to 0.4%. The EUR/USD forex trading market, which had previously almost touched the $1.19 mark, slumped on the core inflation news.

The euro trend might also have reacted to the remarks by Europe’s top banker. On Thursday, September 10, Christine Lagarde, ECB President, said that they will closely watch the euro when it is rising.

The currency has received a boost recently not only because of a weakening dollar but also because of the buoyant growth of the European economies. The countries in the block have seen their economies recover in line with the expectations.

Sterling’s Struggle Persists Despite the Encouraging Numbers

The U.K.’s Office of the National Statistics (ONS) released what experts termed as a strong set of data for July showing that the domestic economy is recovering well. The monthly GDP numbers, industrial production, and manufacturing data were all upbeat. However, these numbers did nothing to significantly elevate the pound.

Forex brokers note a continued caution around the British currency, which was represented by the drop that the pound manifested most of Friday, September 11, touching multi-week lows. The dips have largely been because traders have chosen to disregard the relevant data, but instead have trained their focus on the debacle with Europe.

The U.K. has found itself right in the fix caused by the Brexit dilemma. Last week, the U.K. prime minister, Boris Johnson, announced that his government is pushing for a bill that seeks to deviate from the original withdrawal agreement acknowledged by the E.U.

The E.U. has taken a hard stance on Britain’s attempt to pass the bill. According to the union, the bill will greatly change the initial agreement. The European Commission vice president, Maros Sefcovic, told U.K. officials that the idea of deviating from the original agreement is an extreme violation of the law that has seriously damaged the trust the U.K. commanded.

The back and forth between the U.K. and Europe is undermining the value of the pound. Moreover, it is increasing the caution among forex traders dealing in the USD/GPB pair.

Wall Street Rebounds on the Backdrop of a Strong Market Reopening

On Wall Street, the past week was a rollercoaster of sorts for equities markets. A sharp pullback experienced towards the end of week that ended on Saturday, September 5, gave way to a reprieve on Wednesday, September 9.

However, major markets stayed down on Thursday, September 10, only to rise again the following day with the major names in tech leading the rally. Both Nasdaq and the S&P 500 reopened strongly, recording gains of almost 1% on Friday, September 11.

The rebound succeeded a massive sell-off where Nasdaq dived by about 10% in just 72 hours. As witnessed recently, corrections often come but following the huge run up seen during the week in question, traders’ only hope was to conclude the trading on a high and evade the back to back losses that the S&P 500 has recorded in the past 5 consecutive weeks.

The Compounding Issue

The problem with the pound goes far deeper than the U.K.’s trouble with Brexit. Granted, Boris Johnson’s intended amendment bill on Brexit has kicked any remaining prospects of a clean exit out the window. However, the new local quarantine and containment regulations that the country is imposing to curb a resurgence of coronavirus will also affect the pound in the long-term.

The U.K. recently banned gatherings of more than six people. The new guidelines which came into effect on Monday, September 14, aim to stem the resurgence of coronavirus cases.

According to the government’s directive, larger groups holding meeting either indoors or outdoors are banned. However, the guideline does not apply to workplaces, schools, and Covid-secure functions that include funerals, weddings, and organized team sports among such other functions.

Besides, the economic growth trend is positive but the pace seems to have slackened a bit. According to the ONS data, July’s GDP figures stand at 6.6%, which is 0.1% lower than the economists’ expectations and far lower than the 8.7% growth increase recorded in June.

Overall, the total output is still 11.7% below the pre-pandemic numbers. According to the ONS’s director of economic statistics, Darren Morgan, the U.K.’s economy is firmly on the path to recovery. However, it still is more than halfway off the pre-pandemic mark, and that reality will keep affecting the pound.

Final Thoughts

A combination of factors weighed in to bring the price of the major currencies down. In the U.S., the core inflation data affected the EUR/USD pair, while the Brexit jitters in the U.K. appear to hold the Sterling on ransom. The inflation data also affected the uptake of stocks in the week ending Saturday, September 12.