GBP hits 2-month high on better-than-expected retail sales data

• USD is mixed after better US jobs data increased bets the Fed will cut its stimulus next month

• GBP hits 2-month high on better-than-expected retail sales data

• Commodity-linked New Zealand dollar climbed on expectations the RBNZ will raise interest rates

USD – The US dollar started the morning lower against most major currencies but has since rebounded on newly released economic data that bolstered speculation the Fed may begin cutting its monetary stimulus as soon as next month. Claims for jobless benefits unexpectedly dropped last week to the lowest level in almost six years, signaling the US job market continues to mend. The number of applications for unemployment insurance payments declined by 15,000 to 320,000 in the week ended Aug. 10, the lowest weekly read since October 2007. In addition, the Empire State Manufacturing Survey slipped to 8.24 in August from 9.5 in July, which means that activity is still strong, despite being lower than July. Meanwhile, the cost of living in the US rose in July for a third month, supporting the Federal Reserve’s forecast that inflation will move closer to its target. The consumer price index increased 0.2% after a 0.5% gain in June. The core measure, which excludes the volatile food and energy components, also climbed 0.2% from June. The Fed’s preferred gauge of inflation showed prices rising at a 1.3% annual rate in June. Climbing up to the Fed’s inflation goal of 2%, the US is still slightly below the rate expected before the central bank curtails its stimulus. However, the move has led many investors to believe the rise is enough to warrant a reduction in the Fed’s current monetary policy.

EUR – The euro dipped slightly today, down 0.2% after being up earlier in the trading session. With very few European data releases, the markets are still focused on yesterday’s GDP numbers, which showed that the Eurozone has pulled out of its longest recession to date. The latest slew of economic data has been bullish for the euro, with a positive GDP report, a robust German ZEW report, and a strong German manufacturing PMI all being released over the past seven days. However, over that same stretch, the euro has weakened about 1% vs. the greenback amid growing market expectations that the Fed may begin to scale back its stimulus programs as early as September. Meanwhile, despite positive signs pointing towards a long-term Eurozone recovery, the peripheral economies are still struggling, reducing the likelihood of the ECB ending its accommodative monetary policy anytime soon.

GBP – Sterling hit a two-month high against the US dollar after UK retail sales beat forecasts and supported expectations of early monetary tightening. Retail sales for July rose 1.1% from a month earlier, easily beating expectations of a 0.6% rise. That comes after a string of recent releases, ranging from rising house prices to a jump in services activity and brighter prospects for the job market. On the news, investors have increased their expectations of a hike in the bank rate, which is currently at 0.5%. Under its "forward guidance" plan, the BoE expects to keep rates low until the end of 2016 when it expects the jobless rate to fall to 7%. But a steady improvement in data is leading to doubts whether the guidance plan can keep rates floored for that long. The British pound was up 0.3%, having hit GBP/USD 1.5595, its highest level since mid-June.

JPY – The yen is up 0.2% vs. the dollar, hovering around 97.90 after a flat trading session yesterday.
Earlier today, multiple Finance Ministers denied reports released earlier in the week that stated the Japanese government was considering cutting the corporate tax rate in order to help offset the impact of a consumption tax increase. The Nikkei index also closed down 2.1%, lifting the yen and falling in line with the recent inverse correlation between Tokyo shares and the Japanese currency.

Commodity currencies – The New Zealand dollar climbed against the US dollar following a string of upbeat domestic data including strong consumer confidence and PMI data. Market investors are leaning towards a higher return and placing bets on the kiwi on expectations the RBNZ will raise interest rates.
The Australian dollar held steady against the US dollar with the help of iron ore, their single biggest export earner, which reached a five-month high, 29% higher since June. Even with the RBA slashing rates to record lows last week, many investors still believe that another interest rate cut will need to occur to support activity. The Canadian dollar slightly weakened against the broadly firmer US dollar, which rose on better US jobs data. The CAD, which has been outperforming all major currencies with the exception of the GBP, was trading between C$1.0301 and C$1.0364 in the interbank market this morning.