USD broadly weaker as producer prices held steady
EUR flat despite first positive GDP reading in six quarters
GBP stronger on robust unemployment data and additional guidance from BoE
USD - The US dollar broadly weakened against most major currencies with the exception of the Swiss Franc, whose consumer confidence rose to a four-month high. Domestically, wholesale prices in the US were little changed in July, but reflected the biggest drop in auto costs in four years. The unexpected steady reading in producer prices followed a 0.8% gain in June. Lower prices for raw materials suggest slower growth from abroad as a result of a declining global demand for goods. Core prices, which exclude food and energy, slightly increased 0.1% last month, less than the 0.2% that was expected. Meanwhile, according to a Bloomberg study, 65% of economists surveyed felt Fed Chairman Bernanke will most likely reduce the central bank’s $85 billion in monthly bond purchases next month. The FOMC’s first step may be small, with monthly purchases tapered by $10 billion to a $75 billion pace. The next FOMC meeting is September 17-18.
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EUR - The euro remains flat today vs. the dollar despite better-than-expected second quarter GDP data that showed the Eurozone has emerged from its longest recession to date. The Eurozone economy grew 0.3%, the first positive growth number in six quarters, beating expectations of a 0.2% increase. The currency bloc’s largest economies, Germany and France, grew at 0.7% q/q and 0.5% q/q respectively, bolstering the GDP turnaround. In spite of this positive news, some of the peripheral economies continue to struggle, prompting the ECB to keep interest rates low for the foreseeable future. Meanwhile, growing expectations that the Fed will begin to scale back its $85B bond-buying program as early as next month are weighing down on the euro, causing some analysts to have a more bearish outlook on the single currency.
GBP - Sterling rose against the dollar this morning after strong jobs data and an unexpected guidance from the BoE. Jobless benefits in the UK fell sharply to a monthly change of -29,200 vs. a forecast of -15,000. Meanwhile, Martin Weale, one of the external members of the BoE's Monetary Policy Committee, created headlines when he expressed doubts about how long the central bank will keep interest rates at record lows. Minutes of the BoE's August policy meeting revealed Weale thought the current safeguards announced by new BoE Governor Mark Carney against excess inflation were too weak. Carney pledged last week to keep rates low until unemployment hits 7%, in a new approach for the central bank that is strongly backed by finance minister George Osborne. Better jobs data and mixed signals from the BoE minutes pushed the sterling higher against the dollar and markets increased their expectations for a rise in BoE interest rates from their record-low 0.5%.
JPY – The Japanese yen rose 0.17% against the broadly weaker dollar as limited news flow was released from the region. Investors, for the most part, are positioning their assets for whether or not the Fed will taper its bond purchase program next month. Doubtful comments from policymakers about the release of any detailed plans on the program boosted sentiment in US stock markets that carried into Asian trade, helping Japan's benchmark Nikkei stock average to finish at a one-week high.
Commodity Currencies – The New Zealand dollar strengthened against the US dollar following a strong Q2 retail sales data report that showed sales volume rose 1.7% and core sales climbed the most since 2006. Despite the recent dairy giant Fonterra’s contamination scare last week, the kiwi managed to firm up sparking expectations that the RBNZ could be one of the first central banks to actually start tightening policy, creating a case for an interest rate hike in coming months. The Australian dollar held steady vs. the US dollar despite recent data released on Australian wages showing limited growth in Q2, which is what the RBA wants to see to help limit inflation. The Canadian dollar climbed against the US dollar with limited movement expectations until the release of manufacturing data this Friday. The CAD is expected to trade between 1.0250 and 1.0450 this week, keeping within its ranges this past month.
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