The U.S. dollar ended last week lower against most of its major currency peers after U.S. retail sales disappointed bulls who thought that the past two robust employment reports will boost spending. Retail sales were flat in July following a revised 0.8% increase in June, and producer prices declined 0.4% for the first time in four months and the largest since September 2015. This led market participants to believe that a rate hike would be pushed further towards 2017, with chances of a 25 basis point increase by December standing at 44.9%.
Fed minutes and CPI next
Minutes of the Federal Reserve July monetary policy meeting will be released on Wednesday and since short term risks to economic outlook have diminished according to their latest statement it will be interesting to see if Fed officials turn more hawkish in terms of tightening monetary policy. We have already seen couple of Fed members signaling a rate hike possibility in 2016 and speeches from presidents Dennis Lockhart and James Bullard on Tuesday and Wednesday will likely re-affirm to their commitment. However, investors want a confirmation from Chair Janet Yellen, but they have to wait until August 26 when she is due to speak at the Fed’s Jackson Hole symposium.
On the data front, U.S. consumer prices will be the major risk event for the dollar the week ahead, as inflation remains the key ingredient required to convince markets that interest rates could go up soon.
U.K. post-referendum data to start flowing
Sterling was the only major currency to end lower against the U.S. dollar past week on comments from BoE’s Ian McCafferty suggesting that more easing is likely to be required if the U.K. economy slows as initial survey data shows. Sterling took another hit after Royal Institution of Chartered Surveyors showed that property transitions declined to levels last seen in 2008’s financial crisis and prices increased at the slowest pace in three years last month.
Hard data will start flowing from the U.K and the week ahead will unveil the first employment, retail sales, and inflation reports post the referendum vote. Softer than expected readings will intensify fears that more QE will be required, which could send U.K. gilt yields to new record lows, adding more pressure on the weak sterling.
Japans GDP to indicate more stimulus needs
The Japanese Yen has been stuck in a 200 pips trading range since the beginning of August, thank to market volatility measures which fell to their lowest levels in months. Fiscal and monetary stimulus have been the main motives for USDJPY moves and after BoJ failed to deliver bold measures last month, attention is turning towards next BoJ meeting in September 21. Japan’s second quarter GDP release on Monday is going to be major risk event for JPY, with expectations of a merely 0.2% economic growth Q-o-Q. This is going to highlight again the necessity of fast action from the monetary side. I believe that stimulus measures will be announced in September, and it’s just about the form and size of the package. Until then markets are likely to start pricing in a monetary policy action, which could lead USDJPY to break above 102.81 (two weeks high).