There’s a slight disconnect forming in the currency markets between investors and the US Federal Reserve.
On the one hand, traders seem to be factoring in a cheaper US dollar in the wake of last’s week’s non-farm payroll data, which showed an easing up of wage growth; ostensibly a sign of easing inflationary pressures that could herald a more dovish approach to interest rates.
On the other hand, the US Federal Reserve has made few overtures to a lower terminal rate. Rather, Fed minutes released yesterday saw several members warning against loosening monetary policy given their historical experience.
Perhaps Thursday’s US inflation reading will give more clarity to the macro situation.
Against this backdrop, the US Dollar Index (DXY) closed at a seven-month low of 102.79, though it has since seen a small rebound to 102.94 this morning.
GBP/USD cuts back after strong Monday gains – Source: dailyfx.com
Cable added 60 pips to close the Monday session at 1.218. But Cable has since shed a third of those pips this morning, bringing the pair back to 1.215, though it still remains comfortably above the 20-day moving average.
EUR/USD closed at seven-month highs of 1.073, where it has so far remained this morning.
The euro is also seeing its third straight session of gains against the pound after rebounding off the 20-day moving average on Sunday.
While it was a pretty volatile session, EUR/GBP closed higher at 88.08p and has climbed another 0.2% higher to 88.24p this morning.