Dollar Trades Higher In Wake Of The FOMC

The US dollar gains scored yesterday in response to what appeared to be a more hawkish FOMC than expected have been extended today. The euro and the Swiss franc have recorded new lows for the month.  

Sterling’s attempt to recover from the election rout fizzled yesterday above $1.28 after the poor average weekly earnings data. News today that May retail sales were dismal compounds concerns that higher inflation and weaker earnings growth will undermine consumption, and through it, production. Retail sales, excluding auto fuel, fell 1.6%, the most this year. It follows a revised 2.2% rise in April (from 2.0%). The decline was widespread, everything but fuel. Household goods sales fell 5.7%. Department store sales were off 0.8%, and sales at other stores fell 2.9%. The year-over-year pace fell to 0.9%, matching a four-year low.  

The Bank of England meets. Although Forbes is likely to dissent again at this her last meeting, she has failed to persuade her colleagues, and a 7-1 vote is expected. The minutes will likely recognize the recent high frequency data and risks. Focusing on the signal, the strongest case will be made for a steady hand.   

In some ways, a do-nothing MPC meeting may be overshadowed by the Mansion House speeches tonight by Hammond and Carney. Recall many expected Hammond to have lost his post in if the Tories would have been able to secure a majority in parliament. He is expected to make a case for a more pro-business Brexit, and while that sounds good, it is not clear what it means. Of course, the UK wants access to the single market, but the EU does not appear prepared to compromise on the four freedoms. The central trade-off of “control over national borders” and the single market remains as stark today as it was a year ago.  

The only major currency that is gaining against the dollar today is the Australian dollar. It is trading at the upper end of yesterday’s range and trying to get a foothold above $0.7600. It began the month below $0.7400. A strong employment report is a key driver. The unemployment rate fell to 5.5% from 5.7%, and the participation rate ticked up to 64.9% from 64.8%. The country grew 42k job, four-times more than expected and the April jobs growth was revised to 46.1k from 37.4k. Those jobs Australia created were all full-time positions (52.1k).