Weekly Review June 19
The dollar gained greater confidence over the second half of the week as the Federal Reserve maintained an optimistic tone surrounding the outlook and expected to increase interest rates further. Markets, however, were not entirely convinced given mixed data and the dollar was marginally weaker for the week as a whole.
Ahead of the Federal Reserve policy statement there were two notably negative data releases on the US economy. Headline retail sales fell 0.3% in May while consumer prices declined 0.2% on the month with core data also weaker than expected for the month.
The data triggered fresh doubts surrounding the economic outlook and increased expectations that inflation would stay low. If economic growth is subdued and little in the way of inflation pressure, there would be less reason for the Fed to increase interest rates further.
The data, therefore, put downward pressure on the dollar with a fresh 7-month low for the trade-weighted index.
The Fed did deliver another rate increase at their policy meeting on Wednesday and the median projections from individual committee members indicated that rates were still expected to be increased gain before the end of 2017.
The dollar gained renewed support following the statement and was also boosted by strong readings for the New York and Philadelphia Fed manufacturing surveys. One Fed member, Kashkari dissented from the rate increase and uncertainty over the economy was still an important factor holding back the dollar which closed the week marginally lower on a trade-weighted basis.
There were high-profile economic data releases over the week, although they were overshadowed to a significant extent by renewed criticism of Prime Minister May following a deadly fire in London.
There was fresh speculation over a leadership challenge to May and a lack of clarity surrounding the Brexit negotiations as overall political uncertainty remained extremely high.
As far as the economic data is concerned, the CPI inflation rate increased to 2.9% from 2.7% the previous month and this was the strongest rate for close to four years.
Employment data remained strong, but there was a slowdown in average earnings growth to 2.1% from 2.3% the previous month. The combination of higher inflation and subdued earnings growth will increase policy complications for the Bank of England.
Overall, markets were convinced that weak earnings growth would help persuade the Bank of England to keep interest rates on hold, but it didn’t. Read more to understand the correlation between currency and interest rates.
In the event, rates were unchanged at 0.25%, but there was 5-3 vote as three members voted for an immediate increase in interest rates given the increase in inflation. The unexpected 5-3 vote indicated that the bank was closer than expected to raising rates and Sterling moved higher.
There was a weaker than expected reading for retail sales and the net outcome was even more uncertainty surrounding Sterling direction. GBP/USD hit selling interest near 1.2800 with EUR/GBP unable to hold above 0.8800.
The Euro-zone economic data had little impact on the week with inflation confirmed at 1.4% for May.
There was some positive sentiment surrounding Greece as the Euro-zone members moved to agree the next tranche of loan funds.
Overall, the Euro held firm with only limited selling pressure with EUR/USD just above 1.1200.
There was no change in policy by the Bank of Japan with interest rates at -0.1% and a target of near zero for long-term interest rates.
The Swiss National Bank also left interest rates on hold at -0.75% following the latest policy meeting.
Oil prices came under further pressure during the week as increased US production continued to undermine support.
Equity markets were unsettled by weakness in technology stocks, although overall losses were limited.
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