Talking Points
UK End of World Cup Boost for Retail Sales
EZ CPI lower than expected
US Philly Fed, LI on tap
The summer doldrums continued to take its toll on the markets, as low liquidity and sparse economic data left the EUR/USD and USD/JPY trading in paper-thin ranges for much of the Asian and early European sessions. With absolutely no reports out of Japan today, the USD/JPY drifted down towards 115.20 on the momentum of yesterdays dollar weakness. EUR/USD barely made it out of its own 30 point range, despite deflationary data out of the Euro-zone. The currency dropped on the news that CPI in July fell -0.1% versus an expected flat reading, subsequently dragging the annual rate to 2.4% from 2.5% in June, which is still well above the ECBs target of 2%. The Euro-zones Industrial Production figures werent impressive either, as Junes figure slipped in line with expectations to -0.1% following Mays stellar jump of 1.6%. The contraction in both figures could find ultra-hawkish ECB members wondering if the newly raised rates are still very accommodative, as broad based growth was an underlying assumption for the central bankers.
This past week hasnt been the most positive for the UK, as declines in CPI and rising unemployment showed the vulnerabilities of the economy and the downside risks to growth. The GBP/USD, however, has proven to be rather resilient and remains higher for the week this morning being no exception. While Sterling did dip immediately upon the report that July Retail Sales in the UK sharply dropped -0.3% against a predicted gain of 0.2%, GBP/USD held above 1.8950, as it has for most of the week. The decline in sales was a result of the end of the World Cup boost when household goods, such as televisions, remained on store shelves. A continuation of tepid data out of the UK may put a lid on any additional tightening by the BOE, especially in the face of weakening consumer spending, and could stifle further Cable strength.
Today, the primary event risk lies with the US data. This past weeks PPI and CPI figures have sapped dollar strength, but improvements in Leading Indicators could give the greenback a boost. The Philly Fed report, however, may have the most risk attached to it following Tuesdays nosedive in the Empire Manufacturing reading. Similar unexpected drops in todays report will not bode well for dollar bulls, as the probability of Fed neutrality becomes greater and greater.
