The U.S. dollar’s negative momentum from yesterday afternoon continued overnight with the Bloomberg Spot Dollar Index touching a three-month low. The greenback came under slight pressure yesterday as the minutes of the last Federal Reserve meeting showed that voting members were split as to whether rates should be hiked later this year. Policy makers seemed to agree that the labor market is improving but there was disagreement whether the U.S. is reaching full employment. It is widely expected that full employment would push wages higher and pull inflation up as well. However, some members stated that they believe they will have ample time to react if inflation pressures become apparent.
The perceived lack of urgency has lead traders to pare down bets the Fed will act later this year, dragging the greenback lower. Swaps showed a 51.0% change of a Fed rate hike before the minute’s release. They currently sit at 46.0%. Tempus holds our belief that the next rate hike will not take place until 2017.
Fed members William Dudley and John Williams will both speak today and could spark volatility.
The British pound was the biggest winner overnight, gaining nearly 1.0% against the U.S. dollar before giving up some of its gains. Indeed, the sterling touched a two month high after another report pointed to a rosier outlook in post-Brexit Britain. Retail sales jumped 1.4% in July, the best July reading since 2002, according to the Office for National Statistics. The print beat expectations for a 0.1% rise and follows a dismal 0.9% contraction in June.
The data print is the third this week that has beat expectations, which shows that the British economy may rebound from the Brexit vote better than some had expected. Inflation data impressed on Tuesday which was followed by good labor data yesterday.
The Japanese yen briefly traded past a large physiological level for the second time this week overnight. The yen remains near its strongest level of the year against the U.S. dollar and within striking distance of levels not seen since the summer of 2014.
Data released overnight shows the pressure a strong yen puts on the export-driven Japanese economy. Japanese exports fell 14.0% in July from the year earlier. This represents the biggest decline since 2009 and is the 10 consecutive month of declines. The Bank of Japan will re-evaluate its monetary policy next month and speculation is growing that the central bank will need to take additional measures to prop up the world’s third biggest economy.