Dollar Surges Further after Strong Retail Sales, UK Tumbles Again on CPI Miss

Dollar is extending this week’s rebound in early US session after a string of solid economic data. Meanwhile, Sterling is trading as one of the weakest after another CPI miss. From US, headline retail sales rose 0.6% in July versus expectation of 0.4%. Ex-auto sales rose 0.5% versus expectation of 0.3%. Empire state manufacturing jumped to 25.2 in August and beat expectation of 10.3%. Import price index rose 0.1% mom in July. Technically, GBP/USD’s break of 1.2932 is seen as a key near term bearish signal and the pair is now heading back to 1.2588 support. USD/JPY’s break of 110.62 resistance also is also taken as a sign of near term reversal. But for the moment, EUR/USD is holding well above 1.1606 and maintains bullish outlook.

Rebound of the greenback started earlier this week as threat of imminent war between US and North Korea abated. New York Fed President William Dudley’s comments yesterday gave Dollar another boost. Dudley, an influential member of FOMC, affirmed that he remained in "favor of doing another rate hike later this year". He prefers a rate hike despite soft inflation as "1) monetary policy is still accommodative, so the level of short-term rates is pretty low, and 2) and this is probably even more important, financial conditions have been easing rather than tightening". He indicated that "financial conditions are easier today than they were a year ago". Dudley added that it is not unreasonable to announce the balance sheet reduction plan in September. He forecast the portfolio would shrink to between USD 2.5-3.5T after five years.

Sterling dives on another CPI miss

Sterling tumbles broadly today, except versus Yen, as UK CPI missed expectations again. Headline CPI dropped -0.1% mom in July versus expectation of 0.0% mom. Annual rate of CPI was unchanged at 2.6% yoy, below expectation of 2.7% yoy. Core CPI was also unchanged at 2.4% yoy, below expectation of 2.5% yoy. RPI, on the other hand, rose to 3.6% yoy, up from 3.5% yoy and beat expectation of 3.5% yoy. Another downside surprise in CPI further reduced the chance of an early rate hike by BoE. And there are talks that UK CPI won’t even hit 3% level later in the year as BoE projected. Also from UK, PPI input slowed to 6.5% yoy, PPI output slowed to 3.2% yoy while PPI output core slowed to 2.4% yoy. House price index rose 4.9% yoy in June.

German GDP solid but missed expectation

German GDP rose 0.6% qoq in Q2, below expectation of 0.7% qoq. Year on year growth was pushed up to 2.1%, highest in three years. While Euro dips mildly after the release, it’s staying bullish against other currencies in general. Also from Germany, the constitutional court requested European court to make a ruling on ECB’s EUR 2.3T monetary financing. The German constitutional court said that "significant reasons indicate that the ECB decisions governing the asset purchase programme violate the prohibition of monetary financing and exceed the monetary policy mandate of the European Central Bank, thus encroaching upon the competences of the Member States."

Staying in Germany, Finance Minister Wolfgang Schaeuble said the he hoped ECB’s ultra-loose monetary policy would end in the foreseeable future. He noted that "no one seriously disputes that interest rates are rather too low for the strength of the German economy and the exchange rate of the euro, which is rising now." And in his view, most people expect ECB to take a further step at the upcoming meeting in September.

RBA minutes paint positive outlook

RBA’s minutes for the August meeting revealed that policymakers were optimistic over the global and domestic economies. The central bank forecast that the economy would soon be growing at an annual rate of 3%, assuming that there’s no major change in the Australian dollar. The central bank added that ‘This assumption was one source of uncertainty’. Policymakers went to warn of the Aussie’s strength, suggesting that ‘a further appreciation of the Australian dollar would be expected to result in a slower pick-up in inflation and economic activity than currently forecast’. Meanwhile, RBA also signaled concerns over the housing market and household debt, while appeared more comfortable over the employment situation. More in RBA’s Main Concerns Shifted to Housing Market From Employment

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2939; (P) 1.2980; (R1) 1.3004; More…

GBP/USD’s fall from 1.3267 resumed by breaking 1.2932 support and reaches as low as 1.2853 so far. The development affirm our bearish view that correction from 1.1946 is completed at 1.3267. Intraday bias is back on the downside for 1.2588 key near term support for confirming our view. On the upside, break of 1.3030 resistance is needed to indicate short term bottoming. Otherwise, outlook will stay cautiously bearish in case of recovery.

In the bigger picture, overall, price actions from 1.1946 medium term low are seen as a corrective pattern. While further rise cannot be ruled out, larger outlook remains bearish as long as 1.3444 key resistance holds. Down trend from 1.7190 (2014 high) is expected to resume later after the correction completes. And break of 1.2588 will indicate that such down trend is resuming.

Economic Indicators Update