As we approach the weekend, the dollar is facing a weekly decrease in value against the euro.
By Peter Martin
Saturday, June 21, 2014
It has been dented by the Fed’s announcement mid-week that it will likely be appropriate to maintain interest rates close to zero ‘for a considerable time’ even after the end of its current asset purchase program. The dollar lost ground against the euro on both Wednesday and Thursday, following the FOMC meeting, and early on Friday EUR/USD pushed as high as 1.3634.
Despite Fed Chair Janet Yellen’s apparent lack of anxiety regarding inflation, there are question marks over how fast prices are rising, with Tuesday’s CPI report revealing inflation warmed up more than expected last month. The Fed’s preferred measure of inflation, the Bureau of Economic Analysis’ personal consumption expenditure price index (a.k.a. the PCE price index), is released next Thursday.
The PCE price index rose 1.6% in April from a year earlier and any indication of a faster pace than that next week could create some consternation for the Fed. There was something of a rebound in the value of the dollar by lunchtime in New York, with EUR/USD dropping 0.19% on the day down to 1.3582.
Inflation will be a key consideration for the Bank of Canada after a report today showed Canadian inflation jumping last month to an annual pace of 2.3%. Not only was this much faster than expected (the consensus expectation was for a 2.0% annual change), but it is the first time in over two years that the CPI has come in above the Bank of Canada’s 2% target. The core rate, which excludes certain volatile components such as food and energy, rose 0.3% month-on-month for an annual change of 1.5%. This is something of a twist given that Bank of Canada Governor Stephen Poloz was recently warning against the risks of low inflation.
Today’s data may not change the central bank’s big picture significantly (indeed, it is likely welcome news in light of their prior concerns over low prices), but could well see an adjustment to their view on the downside risks to inflation along with a consequent reduced likelihood of any easing in monetary policy. The Loonie strengthened sharply in the aftermath of the report’s release and by early afternoon in New York USD/CAD was down 0.5% at 1.0763. The Canadian dollar was also bolstered by the release of upbeat retail sales data. Statistics Canada said that retails sales surged 1.1% in April, beating expectations of a 0.6% gain, while March’s sales were upwardly revised to 0.1% growth (originally reported as a 0.1% decline).
Looking ahead to next week, the economic calendar is brim-full of potential catalysts to move the forex markets: along with the aforementioned PCE data we also have the flash PMI manufacturing for June, and the most widely-followed gauges of consumer attitudes in the form of the Conference Board’s consumer confidence index and the University of Michigan’s consumer sentiment index. Mid-week we will also get look at the Bureau of Economic Analysis’ third estimate of first-quarter GDP.
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