Fed Rate Hike More Likely On Good Economic News
Yet more evidence was released on Friday showing that the US economy is moving in the direction sought by the Fed. Fed Chair Janet Yellen made it clear in her testimonies before the House and Senate Banking Committees this week that if the economy sticks to its expected path, the central bank will likely raise rates.
By Peter Martin
Friday, July 17, 2015
Today’s data therefore bolsters the case for a 2015 hike, an outcome that should help the US dollar strengthen in an environment in which many other central banks are still considering or openly embracing stimulus measures.
After a relatively soft start in the first half of the year, consumer spending has picked up and we are now starting to see indications of consumer price pressures coming to bear. The US Consumer Price Index (CPI) climbed 0.3% in June (+0.2% when excluding the more volatile components of food and energy), in line with expectations, following a 0.4% increase in May. This nudges the annual change of inflation up to 0.1% at the headline level. While tame and still well-below target, this is the first positive reading for the year. At the core level, inflation looks a lot warmer, up 1.8% year-on-year in June, from +1.7% in May. There’s still a long way to go with the headline rate, but the Fed will likely feel confident in its prediction that inflation will gradually move back to the 2% objective over the medium term.
Ms Yellen also noted in her testimony that homebuilding has picked up lately and another report released today revealed a continuation of that trend. Housing starts jumped a better-than-expected 9.8% in June, climbing to an annualized, seasonally-adjusted pace of 1.174 million units, led by multi-family homes. Building permits were also strong, rising 7.4% to an annual rate of 1.343 million, which will keep hopes buoyant for continued momentum in the home-building sector.
The US dollar was boosted by the economic reports, enjoying broad gains. EUR/USD fell 0.19% to 1.0853, while GBP/USD slid 0.28% to 1.5565 and AUD/USD dropped 0.31% to 0.7380.
There was also inflation data out for Canada, with consumer prices up 0.2% in June, in line with expectations, which takes the year-on-year change to +1.0%, the strongest annual change since March. The Bank of Canada on Wednesday cut its benchmark overnight interest rate by 25 basis points to 0.50%, a move that came despite some fairly solid CPI levels this year, with the central bank more concerned over the drag of soft energy prices on the Canadian economy . Today’s robust CPI change is unlikely to result in any move to undue such a recent cut and USD/CAD rose 0.21% to 1.2984.
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