Dollar Rally Loses Steam on Mixed Data
What’s been happening?
Pound Sterling – UK Markets
According to the Office for National Statistics, the Consumer Price Index (CPI) annual rate in the UK was 2.5% compared to June’s 2.4% reading. Although this data came in line with analysts’ estimates, the fact that Tuesday’s report showed a slowdown in wage growth suggested that the rising inflation would weigh on the real income. Further details of the report revealed that the PPI (output) stayed unchanged on a monthly basis in July while the Retail Price Index rose only 0.1% in the same period.
Commenting on the inflation report, “trimmed mean inflation, which is a measure of core inflation that excludes a fraction of the most extreme price changes, fell by 0.2 percentage points to 1 percent,” Dr Jason Lennard, Senior Economist at the NIESR, said. “This measure of core inflation fell in 10 of the 12 regions of the United Kingdom. The fall cannot be explained by the summer sales, as the fraction of goods and services at sales prices was the lowest since 2012. The fall is instead explained by more non-sale price decreases and fewer price increases. Based on this analysis, CPI inflation is set to return to the 2 percent target over the year ahead.”
British foreign secretary Jeremy Hunt, who reiterated that the risk of a no-deal Brexit was increasing yesterday, delivered additional remarks on Wednesday. Hunt argued that a no-deal Brexit would have a short-term impact on the economy and added that more countries needed to realize that a hard Brexit would be a big mistake.
US Dollar – US Markets
The monthly report published by the U.S. Census Bureau on Wednesday showed that the advance estimates of retail and food services sales rose 0.5% from June to July to beat the analysts’ expectation of a 0.1% growth. According to other data, nonfarm business sector labor productivity increased by 2.9% during the second quarter of 2018. Moreover, the Federal Reserve Bank of New York announced that the Empire State Manufacturing Index improved to 25.6 in August from 22.6 in July. Boosted by the upbeat data, the US Dollar Index reached its highest level in more than 13 months at 97.
However, later in the session, a separate report released by the Board of Governors of Federal Reserve System revealed that the industrial production edged up 0.1% in July to fall short of the market expectation of 0.3% while the capacity utilization remained unchanged at 78.1%. Meanwhile, escalating geopolitical tensions weighed on the T-bond yields and made it difficult for the USD to preserve its strength. The US Dollar Index, which renewed its 2018 high at 97 in the early American session, finished the day virtually unchanged near 96.70.
Euro – European Markets
There were no macroeconomic data releases from the euro area on Wednesday. Nevertheless, the shared currency continued to weaken against the dollar while recording modest gains vs. the pound. Meanwhile, the risk-off mood weighed heavily on the equity indices and Germany’s DAX and the UK’s FTSE 100 fell 1.6% and 1.5%, respectively.
What’s coming up?
UK: The Office for National Statistics (ONS) will release the July retail sales figures on Thursday. Analysts expect sales to rebound and increase by 0.2% following June’s 0.5% contraction.
US: The weekly initial jobless claims, Philadelphia Fed Manufacturing Survey, and housing starts/building permits data from the U.S. will be looked upon for fresh impetus.
EU: Trade balance, which is expected to show a surplus of €18 billion in June compared to May’s €16.5 billion, will be the only data featured in the European economic docket.