British Pound Rallies on Inflation Report, Will Jobs Data Curb or Amplify?

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Talking Points:

• Dollar Advances on Yellen Commentary but Checked by Risk Waver
• British Pound Rallies on Inflation Report, Will Jobs Data Curb or Amplify
• Euro Eyes 1.3500 as Equities Slide, Bond Yields Slowly Gain

Dollar Advances on Yellen Commentary but Checked by Risk Waver

Technically speaking, the US Dollar is in the middle of an impressive run. Following Fed Chairwoman’s testimony and a run of data this past session, the Dow Jones FXCM Dollar Index (ticker = USDollar) is up four consecutive trading days. That is the longest run for the benchmark currency in nearly five months. However, practically speaking, the index hasn’t covered any ground. Across its major pairings, its performance is far more inconsistent. Where the greenback has marked strong progress versus the Euro, it is little changed when paired with the Yen and is losing ground to the Pound. This is yet further evidence to the lack of conviction in the market and the need to monitor volatility measures for cues to speculative swells. As it stands, the short-term (one-week) FX volatility measure is just off a record low at 4.67 percent.

This past session, the retail sales (short of forecasts) and import inflation (slightly higher) figures were deemphasized as the market was focusing in on Fed Chair Janet Yellen’s semi-annual testimony before the Senate. Aware of her influence over capital markets and speculation, the central banker walked the line by refusing to commit to any policy paths that the FOMC hasn’t already announced in the path. She remarked that growth and labor conditions were improving, but were still short of target. As for stimulus, she repeated an October end to QE3 was likely if the economy kept pace. As for the exit strategy, it is under discussion but no decisions have been made. Perhaps the most interesting aspect of her remarks was the mention of the financial markets. Where the Fed has been agnostic to making comments on the markets in the past, they are making a concerted reference at most major events. Yellen played down bubbles, but allowed that low-rate environments led to a reach for yield. She went so far as to point out ‘stretched’ levels on junk assets and possible ‘froth’ in certain sectors…

In the upcoming session, we will have round two of Yellen’s testimony (before the House), but it is unlikely to deviate from yesterday’s remarks. The TICS capital flows and PPI figures will be a good data mix, while Fed’s Fisher and the Beige Book will add to the Chair’s influence.

British Pound Rallies on Inflation Report, Will Jobs Data Curb or Amplify

Volume behind GBPUSD surged to the highest level in five months as the pair felt a surge in volatility. While the dollar was doing its part for ‘cable’, the British Pound was under fundamental power itself with the release of the most recent wave of inflation statistics. With the most direct path to rate speculation – the sterling’s primary fuel source – the CPI stood out. The year-over-year reading for June advanced more aggressively than expected to 1.9 percent, while the core pace moved back to the 2.0 percent target. This adds a critical dynamic to the BoE’s rate forecasts – emerging inflation pressures. That said, yields and swaps rose; but have not extended their trend 12-month trend. Perhaps another push is needed. The labor data (jobless claims, ILO unemployment, wages) due today may disarm or leverage rate speculation.

Euro Eyes 1.3500 as Equities Slide, Bond Yields Slowly Gain

Though most FX traders were focused on event risk in other corners of the market, a bullish lean for the US Dollar and British Pound would draw a notable enough contrast to the Euro’s situation to see the currency down. On the docket, the ZEW investor sentiment survey for July showed the outlook for the Eurozone dropped to its lowest level in 11 months while Germany’s own forecast hit a 19-month trough. While still high historically, the measures are sliding dangerously fast. Furthermore, we see the markets themselves are starting to shudder. European equity indexes were down once again and periphery bonds were slowly bleeding as well. As the saying goes, ‘follow the money’.

Canadian Dollar: Don’t Write Off the BoC Decision Too Quickly

Normally, I wouldn’t look to the Bank of Canada’s monetary policy meetings with any kind of expectation for volatility or fundamental presumption for trend generation. Yet, recently, the market has paid greater heed to the nuance in Governor Poloz’s remarks on the state of the economy and bearings for policy. Should the central bank further ease up on the dovish rhetoric adopted earlier in the year, the Canadian dollar may revive its run. Ultimately, a carry currency without a yield stands to lose far more if there isn’t specter of higher returns in the future.

New Zealand Dollar Tumbles Drops after CPI Comes in Weaker than Projected

Having already hiked rates three times, the RBNZ is moving ahead of the fundamentals. Policy is frequently changed in accordance with expectations, but New Zealand’s inflation figures aren’t bearing out those concerns. The 2Q CPI reading posted a weaker-than-expected 1.6 percent annual figure and sent the kiwi reeling. If this doesn’t give Wheeler pause in next week’s rate meet, it can cool subsequent pace.

Chinese Yuan, Australian Dollar Unimpressed by China 2Q GDP Beat

There was confusion in the aftermath of this morning’s Chinese data. A 2Q GDP update was the top billing to a line of data that included retail sales, fixed investment and industrial production. Overall, the data modestly beat out the consensus. Yet, this doesn’t change the general trend behind growth figures (which are softening). Furthermore, it also meets the right balance to preclude the need of further stimulus.

Gold Extends Decline as US and UK Monetary Policy Outlook Firms

While it didn’t suffer the same aching pace suffered Monday, this past session was still emblazoned in red for gold. The 0.7 percent drop from spot was accompanied by another heavy day for volume in derivatives (futures and ETFs). With the US and UK receiving mild nudges towards stimulus withdrawal, there is a motive to work with. That said, this is more likely speculative-based move than underlying fundamentals.**Bring the economic calendar to your charts with the DailyFX News App.

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-- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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