Fed to release meeting minutes, Sterling slips after inflation news

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16 August 2017

thomasdodds

The Dollar roared back against its major peers yesterday with impressive sales data and a renewed calm in geopolitical tensions lifting the Dollar index to a three week high.

N
ews out during Asian trading that North Korea had backed away from its threat to launch missiles towards Guam improved sentiment towards the greenback. Yesterday afternoon’s US retail sales also provided encouragement to Dollar bulls hoping for another interest rate hike by the Federal Reserve before the end of the year.

Retail sales were stronger-than-expected in July, rising 0.6% last month compared to the 0.4% consensus amid a broad based pick-up in almost every major category. This was accompanied by a welcome upward revision to the June number, ensuring that sales have now increased or remained flat in ten of the past eleven months. Yesterday’s data bodes well for overall third quarter GDP and suggests that the US economy is on course to expand at a faster pace than the 2.1% growth recorded in the three months to June.

Focus now shifts firmly to this evening’s Federal Reserve meeting minutes. Any suggestion among policymakers that the recent downtrend in inflation could prove temporary may lift the Dollar this evening.

GBP/EUR closes in on near seven year low

The Pound edged perilously close to its lowest level against the Euro in seven years on Tuesday as weaker-than-expected inflation news and concerns about protracted Brexit negotiations weighed heavily on the currency. Yesterday’s inflation data, which saw the headline number remain unrevised at 2.6% versus the 2.7% consensus, will be a bitter disappointment to Sterling bulls hoping for a Bank of England interest rate hike sometime soon. Meanwhile, plans outlined for a future customs agreement with the EU were deemed a “fantasy” by one senior EU official as negotiations with Europe continue.

This morning’s UK labour report could present another major event risk for the Pound. Earnings growth will, as always, be worth watching and another negative surprise could spark a renewed bout of selling in Sterling today.

German growth remains solid in second quarter

The Euro sold-off for a second straight day on Tuesday amid broad US Dollar strength.

Revised German growth data for the second quarter of the year was mixed, showing that Europe’s largest economy slowed, albeit remained robust. The economy expanded by 0.6% in the three months to June, a modest downward revision, although grew by a larger than consensus 2.1% on a year previous. Traders largely ignored the news given its time lag and the common currency was instead driven almost exclusively by yesterday’s impressive US retail sales.

The data calendar is light in the Eurozone today ahead of Thursday’s inflation numbers and ECB meeting accounts. As such, the main driver is likely to be broad Dollar moves off the back of tonight’s FOMC minutes.