EUR / USD
The Euro resisted significant selling on Thursday and eventually pushed higher as the dollar overall still retreated to the lowest level for close to 8 weeks. In the ECB minutes from July’s meeting, there was relief that the UK referendum impact had been limited, although there was still medium-term uncertainty. The bank confirmed that it was focussed on implementing March’s policy measures and would wait before considering any fresh policy action. The July final CPI inflation rate was confirmed at 0.2% with some disappointment over the core rate. The US Philadelphia Fed index moved back into positive territory at 2.0 for August. The components were generally les favourable, although the six-month outlook strengthened to the strongest level since late 2014. Jobless claims data was slightly better than expected with a decline to 262,000 in the latest week from 266,000 previously with claims below the 300,000 level for 76 weeks in succession, the longest run since 1970. New York Fed Governor Dudley reiterated his comments from Tuesday with greater optimism surrounding the labour market with the time for a rate increase drawing closer. The Euro still pushed to highs above 1.1350 late in the European session. San Francisco Fed Williams remained confident over the economic outlook and stated that the Fed couldn’t wait for inflation to emerge given the risk that there would need to be a sharp increase in rates to reverse the damage. In this context, he would prefer to see a rate increase sooner rather than later. The dollar was still unable to make significant headway with the Euro above 1.1300 level in early Europe on Friday with Fed comments still under close scrutiny.
The dollar was unable to make any impression on the yen during Thursday with a further dip below the 100.0 level as underlying US sentiment remained weaker. There was further speculation that repatriation flows from the US bond market were supporting the Japanese currency. The yen was also resilient despite further strong capital outflows from Japan. The monthly Japanese Reuters Tankan index declined to 1 from 3 previously which was the lowest reading since April 2013, although there was an improvement in the services sector for the first time in five months. There was no stepping-up of verbal intervention against a strong yen during the day, although there will still be wariness over potential action and position adjustment into the weekend will be important. Overall, the dollar consolidated just above the 100 level on Friday without being able to make any significant headway as yen resilience continued.
UK retail sales data was stronger than expected with a 1.4% monthly increase for July following a 0.9% gain the previous month with a 5.9% annual gain from 4.3% previously while there was a 1.5% monthly gain excluding fuel sales. The data helped underpin confidence in the spending outlook despite the risk that sales had been distorted by weather conditions. There were also some fresh doubts whether the Bank of England would be in a position to ease monetary policy further. Although there was no major shift in interest rate futures, there was an important element of short covering in Sterling positions which pushed the currency higher. Sterling also drew support from a further rise in oil prices with WTI breaking to highs above $48.0 p/b. The UK currency pushed to highs near 1.3200 against the dollar, the strongest figure since the August Bank of England policy decision while the Euro dipped to the 0.8600 area.
The Euro was unable to make any impression on the franc during Thursday with a dip back below the 1.0850 level while the dollar also remained on the defensive with 8-week lows just below 0.9550. Overall risk conditions were slightly more cautious, although equity markets maintained a broadly firm tone. The strength in oil prices should put upward pressure on the inflation rate with a greater potential for the consumer inflation rate likely to turn positive before the end of 2016 which will lessen pressure for further National Bank action to weaken the currency.