Downward correction in USD loses its momentum (Daily analysis 02.08.2021)

The weakening correction in the dollar that began after the Federal Reserve meeting and took the EUR/USD pair to 1.19 may lose momentum temporarily, but we expect the exchange rate to return above 1.20 later this year.

The franc as well as the pound were among the strongest currencies in July. We are sceptical about the prospects for both currencies and see plenty of space to weaken, especially in the case of sterling.

One week to wait for this year's record employment change

Last week, the US monetary authorities took another step towards initiating the phasing out of asset purchases. When this process begins will now depend primarily on the pace of the labour market recovery. Even the conference of central bankers at the Jackson Hole resort at the end of August, which in the past has been the scene of important policy announcements, may still come into play. On Friday, the monthly report will be published, which will answer how the economic situation in the key sphere of the economy for the Fed looked in July. It should be remembered that June saw the highest job gains this year (850,000).

The forecasts assume that this result has been slightly beaten, which means that the spring disturbances (fears of a pandemic, crisis benefits and allowances) delaying the labour market's recovery are fading away. Even in this optimistic scenario, the number of employed people will still be about 5 million lower than before the pandemic, but policymakers will warmly welcome the recovery pace, especially as the number of vacancies exceeds 9 million! In other words: it was not the demand for labour that was the problem, but its supply. In addition to the labour market data, the main focus will be on the leading business cycle barometers, i.e. the ISM index for manufacturing (due this afternoon) and services (due on Wednesday).

Czechs and Hungarians at war with inflation

The week's event in the CEE3 region will be the decision of the Czech Central Bank. Unlike the Polish monetary authorities, decision-makers there are concerned about inflation getting out of control and the so-called second-round effects, i.e. a dangerous spiral of wage and inflation expectations. As a result, the virtually pre-set interest rate hike may be accompanied by a clear signal that further rate moves are possible even at each subsequent meeting.

After all, last week, the Hungarian central bank also raised the cost of money more boldly than expected. Poland's monetary policy is in marked contrast to the attitude of central bankers in the region. According to the recently unveiled normalisation strategy, despite 5% inflation, which could accelerate the increases, they will only materialise in the first part of next year. Looking back to the Czech koruna: investors have become accustomed to the prospect of tightening. We expect the EUR/CZK pair to remain at low levels and even fall to 25.00.