The U.S. dollar softened across the board overnight. However, the greenback remains elevated this week as interest rate expectations remain firm. Yesterday’s release of the minutes of the Federal Reserve’s last meeting showed that a number of members said they saw a rate hike as appropriate “relatively soon.” Others stated that it was a “close call” to keep interest rates on hold. Fed Fund Futures are unchanged, showing a 69% chance the Federal Reserve lifts interest rates by the end of the year.
Monetary policy divergence has been the main driver behind dollar strength, and despite this morning’s step backwards, the greenback is in a strong position to regain its momentum.
This morning’s economic data showed that the labor market continues to improve. Jobless claims were only 246K last week. The four week average fell to the lowest level since 1973. A slew of data, including Retail Sales, is set for release tomorrow and could spark volatility. In addition, Janet Yellen will speak at the Boston Fed Conference tomorrow afternoon.
The safe-haven Japanese yen found strength overnight following the release of dreadful Chinese trade data. China recorded its second steepest drop in exports this year. The 10 % year-on-year contraction more than tripled expectations of only a 3.3% decline. The yen had touched its weakest level since July versus the U.S. dollar yesterday.
The Australian dollar dipped to a 3-week low against the U.S. dollar following the disappointing Chinese data. China is Australia’s largest trading partner.
The British pound took a pause from its massive sell-off overnight, but most analysts believe that sterling has yet to carve out a bottom. The sterling is 18% lower against the U.S. dollar since the Brexit vote this summer. The Bank of England has warned that a 20% fall in the pound could cause import prices in the U.K. to rise about 12 to 13% and could lift consumer prices by an extra 4 percentage points over three or four years.
Well, the pound’s demise is already starting to affect the average consumer. Tesco, the U.K.’s largest supermarket chain, is “experiencing availability issues” on a number of Unilever products. Unilever produces everyday products including the popular Marmite breakfast spread, Hellman’s mayonnaise and over 100 Dove personal care products. Unilever wants to raise prices by about 10% to make up for losses due to the pound’s fall.
Other companies, such as Nestle, have stated that they will also look to raise prices in the U.K. In the end, the average consumer will be stuck with higher prices for everyday goods.