The Dollar ascended against the currency majors last week, snapping its decline in the beginning of August. Higher than expected jobs growth data was the stimulus that supported the greenback’s upwards trajectory. As a result, US 10-year yields reversed its five week decline, contributing toward the Dollar to challenge monthly highs. Despite this positive outlook in the employment data, the primary concern on the overall global economic climate still remains. The mutations on the corona virus are leading to further social restrictions implemented by government which will stall a sustainable recovery. US companies are still delaying when employees are returning to offices.
Measuring the direct economic impact of the lock-down restrictions is not an easy calculation, thus estimating the timeline of a recovery is just as challenging. For instance, the slowing global growth that is being experienced is also the outcome of a maturing recovery path from many Asian economies. Likewise, bottlenecks in production supply chains reduce manufacturing output as global commerce is pressured by high transportation costs. The supply of raw materials is unable to match the strong demand; therefore any momentum in growth loses its steam. Any restrictions or quarantines invoked by governments will only weaken economic growth.
As we look into the week ahead, the stability behind the strengthening Dollar will be difficult to break as no central banks will be meeting. One key data release is the US inflation report due on Wednesday. If the report reveals higher number than anticipated, this can result in the FED choosing to tighten fiscal policy sooner. As we consider that US payrolls have been higher than expected, the inflationary pressures will remain on the forefront and thereby keep the Dollar on an upwards trend. The German inflation data released the day earlier would need to surprise on the positive side to have any impact on the Euro. This would be to only possibility for a hawkish tone from the ECB.
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