Political uncertainty sinking dollar
The US dollar is weaker against most of majors after a week where there was little on the US economic calendar with the spotlight on Washington’s rising political tensions. The investigation into Russian ties during the presidential election and the lack of momentum in policy reform put the emphasis on political uncertainty that punished the US dollar. Next week will offer a chance to return to trading on fundamentals with the release of consumer confidence, the Fed’s July rate statement and the preliminary second quarter GDP.
The U.S. Federal Reserve will publish the statement from its Federal Open Market Committee (FOMC) meeting on Wednesday, July 26 at 2:00 pm EDT. There is a low probability of a rate hike in July with the CME FedWatch tool showing a 96.9 percent probability of the Fed funds rate staying at 100–125 basis points. With no press conference following the statement the market will be going through the document for insights into how weaker sales and inflation impact their assessment of the economy. The US central bank is still forecasted to raise interest rates once more before the end of the year.
The Conference Board will release the US consumer confidence survey on Tuesday, July 25 at 10:00 am EDT. Consumers have remained confident through the first half of the year, but the paradox between confidence and spending remains as sales have been disappointing. The US Bureau of Economic Analysis will publish the first estimate of GDP for the second quarter on Friday, July 28 at 8:30 am EDT. The first quarter ended up with a 1.4 percent gain thanks to a rise in consumer spending. The NY Fed recently downgraded its second quarter estimate to 1.90 percent.
The EUR/USD gained 1.543 percent in the last five days. The single currency is trading at 1.1637 in a week that saw the European Central Bank (ECB) deliver a dovish statement by not offering further details on its exit from its quantitive easing program saying only that it will do so with extreme caution. The EUR climbed higher as the overall message was still monetary policy would be shifting in the future, but ECB President Mario Draghi did little to stop the rise of the currency by showing little concern with slowing inflation.
Dollar weakness due to political reasons combined with a less dovish than anticipated rhetoric from the ECB drove the EUR higher with 1.20 not an unreasonable target if economic indicators in the US continue to disappoint. This week there were few fundamentals to build a case for dollar strength, but next week will give the Fed a chance to boost the dollar although its effect could be limited as there are no big changes expected aside from some minor change in the language of the FOMC statement. The first estimate of GDP will come later in the week but has the power to dramatically shift the dollar trend by beating expectations, on the flip side it could accelerate the downward trajectory the greenback is currently on if momentum was lost in the second quarter.
The USD/CAD lost 1.232 during the last five trading sessions. The currency is trading at 1.2558 with the loonie rising against the buck after the release of strong Canadian retail sales. Auto sales helped sales beat the 0.2 percent forecast with a final figure of 0.6 percent. Removing sales of new and used automobiles told a less optimistic picture with a drop of 0.1 percent. Inflation also appears to be slowing down with a loss of 0.1 percent in June. Annual inflation was 1 percent and below the 2 percent target by the Bank of Canada (BoC).
Overall the positive retail sales validate the actions of the central bank who hiked rates earlier in the month by 25 basis points. The Canadian benchmark rate is now 0.75 percent and the BoC is not alone in moving ahead with tighter monetary policy despite low inflation. Forecasters still see a second interest rate hike before the end of the year, with October the most likely candidate.
Stable oil prices and US dollar weakness have amplified the positive effect of the Canadian rate hike for the loonie. The currency has appreciated touching an important psychological 80 cents versus the dollar. NAFTA negotiations are expected to kick off in August and so far there is optimism on the trade deal being tweaked instead of an intensive reworking. Elections in Mexico and the US also incentivize the two nations to expedite the talks.
Market events to watch this week:
Tuesday, July 25
10:00 am USD CB Consumer Confidence
9:30 pm AUD CPI q/q
9:30 pm AUD Trimmed Mean CPI q/q
Wednesday, July 26
4:30 am GBP Prelim GDP q/q
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
Thursday, July 27
8:30 am USD Core Durable Goods Orders m/m
8:30 am USD Unemployment Claims
Friday, July 28
8:30 am CAD GDP m/m
8:30 am USD Advance GDP q/q