Delta set to dominate after Powell beats dollar

  • GBP / USD swung in response to high inflation and dismissive responses from central banks.
  • Covid headlines, UK reopening and US infrastructure talks stand out.
  • The daily chart for mid-July paints a mixed picture.
  • The FX poll indicates short-term declines before a rally thereafter.

Is inflation transient or not? There is no doubt that prices are rising quickly, but no less important is the interpretation of the data by the almighty Fed. Growing cases of Delta COVID-19 on both sides of the pond are expected to gain prominence, as are talks over US infrastructure.

This week in GBP / USD: Rising inflation, no alarm bells

US inflation is undoubtedly on the rise – the consumer price index hit 5.4% year-on-year in June and the core CPI hit 4.5%, two shocking estimates. However, the main drivers remained tied to the reopening – prices for used vehicles, car rentals, airline tickets and clothing. Spending a night in a hotel is also expensive.

Will faster price increases be transitory or will they persist, turning into higher inflation expectations? Investors opted for the latter first, assessing the current pressures and buying the dollar. However, the ultimate judge was Jerome Powell, Chairman of the Federal Reserve.

The world’s most powerful central banker has said that while inflation is expected to stay high for several months, it is transient and should ease. In addition, he said the economy was still “a long way off” from “making further substantial progress” – the Fed’s vague term for determining when to cut its bond buying program.

Seeing that the Fed continues to create $ 120 billion per month, the greenback has lost ground.

As Powell spoke in a room on Capitol Hill, Democrats used another corner of the building to showcase a $ 3.5 trillion infrastructure package. At the time of writing, it is still unclear whether Senator Joe Manchin (D-WV) – the pivotal Conservative Democrat – is backing him. The markets seem to be reserving their judgment for now.

In the UK, Prime Minister Boris Johnson has insisted the July 19 reopening will proceed, despite the rapid spread of the Delta variant. Fears of an increase in deaths and hospitalizations also weighed on the pound.

COVID-19 cases in the US and UK:

Source: FT

The virus is spreading in the United States, which has seen the number of infections double – albeit from a low base and concentrated in places with low vaccination rates. So far, this worrying development has not yet had an impact on the markets.

Getting back to the data, UK inflation is also rearing its ugly head – 2.5% yoy in June, higher than expected. In addition, wage growth accelerated to 7.3% per year in May, a potential precursor to increased spending. Britain’s unemployment rate climbed to 4.8%.

Yet, like in the United States, what matters is what central banks say they will face with rising prices – not anyone else’s interpretation. Bank of England Governor Andrew Bailey has said he will not be forced to hike rates in response to transient inflation, pushing the pound down.

On the other hand, his BOE colleague Michael Saunders presented a hawkish point of view – calling for an end to bond buying and a possible increase in borrowing costs. Saunders’ comments had only a short-lived bullish effect on the pound.

Events in UK: reopening with fear and retail sales in sight

Freedom Day has arrived – nearly all covid regulations will be thrown to the bonfire on July 19, raising fears the current spread of the delta will worsen. Criticism of government decisions – such as confusion over wearing face masks on public transport – could increase the chances of the restrictions returning.

Daily coronavirus infections, hospital admissions and deaths could have a bigger impact on the pound than ever before. If the health services come under pressure, the Prime Minister could turn around again. On the flip side, if vaccinations are at enough levels to reverse the trend, the pound could shine.

More than half of the UK population is fully vaccinated and almost 70% have received at least one dose. However, reaching the last adults turns out to be a more difficult task, as shown by the drop in daily hits. Investors would rather see the chart turn higher.

Source: The Guardian

The retail sales statistics for June are interesting, and they could benefit from a ‘football boost’ – increased consumption due to Euro 2021 matches. Annual increases are expected to remain high due to a lower spending at this time last year.

Markit’s preliminary purchasing managers’ indices for July are likely to show a drop in business confidence after reaching high levels in June. Any score above 50 represents expansion, and the 62.4 level reported for the service sector is particularly high. Holding above 60 should support the pound sterling.

Here is the list of UK events on the FXStreet calendar:

Events in the United States: Delta in and infrastructure in sight

Will the Delta strain derail the American recovery? With nearly half of the population fully protected and around 56% having received at least one injection, many vulnerable areas of the country could be in difficulty. The increase in infections has already increased hospitalizations.

More fire must arm to keep the recovery swift, and the aggregate numbers above mask a sharp divide between states. In Vermont, 75% of the population has received an injection, while the rate is only 38% – about half – in Mississippi.

Without an increase in this chart, there could be more damage that would support the safe haven dollar.

Progress of the vaccine in the United States:

Source: NYT

Senate Majority Leader Chuck Schumer has circled July 21 as the date he wants the infrastructure deal “to move forward.” The massive $ 3.5 trillion package is still awaiting the blessing of Joe Manchin, the most conservative member of the ruling party. The greenback could go up if the legislation advances.

However, there is a good chance that discussions about how to fund this spending will cause delays – and changes – to the package. Markets have ignored the news from Washington, but may tune in if talks advance.

The economic calendar is lighter than in previous weeks, but there are several noteworthy releases. Housing figures should continue to show a robust construction market in June. Markit’s preliminary PMIs for July carry mixed expectations – an increase in activity in the services sector but a decline in the manufacturing sector.

Here are the main US events coming up this week:

GBP / USD technical analysis

The Pound / Dollar is trading within a broad, well-defined range – capped by the round 1.40 level and supported by the 1.3670 double bottom line. Where will he go next? Momentum turns tentatively positive on the daily chart, but the Cable is still below the 50 and 100 Day Simple Moving Averages, and the 200 Day SMA is creeping in there. Overall, the picture is mixed.

Support is waiting at 1.38 which cushioned the pair in mid-July. It is followed by 1.3730, the monthly low. Beyond 1.3670 the next level to watch is 1.3565.

Resistance is at 1.3910 which is the July high. Above 1.40, the next significant highs are 1.4140 and 1.4250.

GBP / USD sentiment

The Delta variant may become more influential on both sides of the Atlantic – and that’s a losing situation for the GBP / USD.

the FXStreet Forecast Survey shows experts expect more pain in the near term – a close below 1.38 in the coming week. However, the tables should turn in favor of the medium to long term bulls, pushing the GBP / USD back towards 1.40 again. The average targets have been revised downwards compared to the previous week.

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