The dollar was broadly weaker against its major peers on Wednesday and during Asian trading on Thursday as lawmakers continued to fail in attempts to force through additional supportive measures for the US economy.

As we have mentioned in the past few weeks, the US government's additional unemployment insurance benefit programme, designed to support individuals laid off during the covid pandemic, ran out at the end of July. Despite ongoing discussions in the past couple of weeks, the Republicans and Democrats remain far apart, with President Trump yesterday accusing the Democrats of refusing to negotiate over the aid package. While we remain confident that both parties will eventually agree on an extension to the programme, we think that a prolonged delay could be particularly damaging to the US economy and would likely continue to weigh on the greenback.

Aside from political news, one of the main focal points in FX trading this week will be Friday’s US retail sales figures - expected to show the impact of the shutdown re-introductions in a handful of US states. Meanwhile, yesterday’s US inflation data actually came in better-than-expected, likely a reflection of the increased consumer spending activity since lockdown measures were initially unwound. The impact on the dollar was, however, limited, with investors instead focusing on the lack of positive news out of Congress.

Euro ignores worse-than-expected industrial output data

Wednesday’s Euro Area industrial production data came in at a slightly less-than-expected 9.1% month-on-month (-12.3% YoY), although this was almost entirely overlooked by investors. Investors seemingly remain confident in their view that the Eurozone economy is set to recover at a faster pace than its US counterpart in the coming months, given one has managed to control the spread of the COVID-19 virus and the other has not. The odd downside surprise in Euro Area data, such as that witnessed yesterday, seems unlikely to change said view.

With no economic data out of the Eurozone today, investors will likely turn their attention to the revised Q2 GDP numbers out on Friday. With no significant revision expected to the numbers, the euro may be driven largely by news elsewhere during the remainder of the week.

Sterling edges higher, UK virus death toll revised sharply lower

The pound has largely brushed aside this week’s news that the UK economy entered into its deepest recession on record in the second quarter, and one of the most severe among the European economies. As we mentioned yesterday, the scale of the downturn was more-or-less expected and driven largely by the delayed re-opening of the UK economy relative to elsewhere. News out so far in the third quarter has actually been highly encouraging, suggesting that the UK economy is rebounding well from the slump.

Headlines out yesterday that the UK’s virus death toll had been revised lower by 5,000 barely registered a blip in the currency markets. It is, however, a noteworthy development that suggests the situation in the UK is far better than thought a couple of days ago. Whether this translates into any meaningful strength in sterling appears unlikely, given that investors are now focusing largely on how well each respective economy is emerging from the downturn.