- Data showed that US consumer inflation rose moderately in July.
- Data on Thursday revealed that US retail sales jumped by 1.0%
- The pound soared after retail sales data showed a robust economy.
Currency futures rose on Friday and Monday as the dollar retreated amid profit-taking. At the same time, the US currency fell at the end of the week as markets raised the chances of a 25 bps September Fed cut. On Thursday, the greenback had soared after sales data showed a robust economy.
Last week, the dollar rallied as data showed the economy was still resilient and inflation was falling in line with expectations. This was a reversal from earlier in the month when markets were convinced the Fed had misjudged the state of the economy. As a result, they had kept high interest rates for too long.
Data showed that consumer inflation rose moderately in July. The annual figure eased to 2.9%, while the monthly figure increased by 0.2%. Consequently, traders lowered the chances of a significant 50 bps rate cut.
Furthermore, data on Thursday revealed that US retail sales jumped by an unexpected 1.0% in July. This report dashed hopes for a super-sized rate cut and further eased fears of a recession. At the same time, other figures revealed a drop in the unemployment rate, suggesting a solid labor market. The likelihood of a 50bps cut fell to 25.5%, indicating expectations for a more gradual pace.
Clearly, the last monthly jobs report was unique and led to some panic about the US economy. However, data has shown a different picture since then, and the dollar has recovered.
Fed rate cut expectations (Source: Bloomberg)
Nevertheless, the slight pullback on Friday and Monday came as investors took profits and fully priced in a 25-bps rate cut in September.
The yen was the biggest beneficiary of the dollar’s weakness. Divergence in policy outlooks between Japan and the US boosted the yen on Friday and Monday. As the Fed prepares to cut, the Bank of Japan might indicate more rate hikes to come.
Meanwhile, the pound soared after retail sales data showed a robust economy. As a result, Bank of England rate cut expectations fell.
This week, investors will pay close attention to the Jackson Hole symposium. Powell might drop clues on the September meeting. Experts believe there is enough economic evidence to prompt policymakers to vote for a rate cut. Traders will also keep an eye on the Fed meeting minutes.
