A busy economic data session had limited impact on the US dollar and the euro as the greenback maintained its steady recovery, while the euro extended its losses. Risk sentiment remained positive with major European stock indices gaining by almost 1%, though demand for gold held up, with the precious metal climbing 0.6% to $1316 an ounce.
Traders chose to put aside their concerns over the heightened geopolitical risks relating to North Korea, while President Trump’s speech yesterday on tax reforms generated little excitement. Trump launched his eagerly awaited tax reform campaign yesterday with a speech in Missouri. The President stuck to his pledge to reduce the corporate tax rate to 15% but the speech was otherwise lacking in detail and markets were sceptical about his ability to see through the reforms.
The data highlight in Europe on Thursday was the Eurozone flash inflation release. Annual CPI across the euro area beat expectations of 1.4% to rise to 1.5%, according to the August preliminary reading, up from 1.3% in July. The core rate, which excludes food and energy items, was unchanged at 1.3% year-on-year versus forecasts it would ease to 1.2%. Unemployment figures were also out today. The Eurozone’s jobless rate remained unchanged at 9.1% in July, in line with forecasts.
Although the inflation data supports the case for tighter policy by the European Central Bank, the euro was firmly stuck in a downtrend, with euro/dollar touching a near one-week low of 1.1821. The single currency came under pressure today after Reuters reported that ECB policymakers are becoming increasingly concerned about the euro’s strength. Sources told Reuters that a higher exchange rate makes it less likely that the ECB will opt for a quick exit from its asset purchase program. They also suggested that a decision on tapering is unlikely next Thursday given that discussions will only begin at next week’s meeting.
The euro was last trading at 1.1857 against the dollar, down 0.2% on the day, and was also down against the yen and the pound at 130.85 yen and 0.9205 pounds.
The dollar pared some of its earlier gains despite another batch of solid US data. Personal income in the US rose by 0.4% month-on-month in July following flat growth in June. Expectations were for an increase of 0.3%. Personal consumption came in slightly below forecasts of 0.4%, growing by 0.3% m/m instead. However, the prior month’s figure was revised up by 0.1% to 0.2%. The Fed’s favourite inflation gauge, the core PCE price index, rose by 0.1% m/m in July, in line with forecasts. But the annual rate fell to its lowest since December 2015, at 1.4%.
Other US data included the weekly jobless claims, the Chicago PMI and pending home sales. Initial claims for unemployment benefits rose by 236k last week, slightly better than forecasts of 237k. Jobless claims have averaged 236.75k in the past four weeks, pointing to a strong nonfarm payrolls number in tomorrow’s jobs report. The Chicago PMI also beat forecasts, holding steady at 58.9 in August instead of falling to 58.5 as expected. Pending homes sales disappointed however as they fell by 0.8% over the month in July, missing estimates of a 0.5% rise.
The greenback retreated from a two-week high 110.66 yen set earlier in the session to around 110.20 yen in late trading. The dollar index stood 0.1% higher at 92.97.
The lack of “decisive progress” in the Brexit negotiations weighed on the pound today, with cable sliding 0.4% to 1.2877. The third round of talks ended today with little agreement on key issues, namely the divorce bill. Hawkish remarks by Bank of England policymaker Michael Saunders earlier in the day failed to lift the British currency.
The Canadian dollar got a significant boost today after Canadian GDP surprised to the upside. Canada’s economy expanded by an annualized rate of 4.5% in the second quarter, which was the best in six years. The figure is well above expectations of 3.7% (the same rate as in the first quarter) and raises the odds of another rate hike by the Bank of Canada this year. The loonie jumped by almost 1% after the data, with dollar/loonie slumping to 1.2520 and reversing most of yesterday’s gains.
Further lifting the loonie today were higher crude oil prices. WTI crude surged by 2.8% to $47.26 in late session, reversing from a 5-week low, and Brent crude stood 2% firmer at $51.90, as hurricane Harvey started to recede and some refineries started coming back online. However, the rise was mainly driven by the intensifying gasoline shortage in the US as a result of the refineries shutdown in Texas, which has pushed gasoline futures up by more than 20% from before the storm.