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The dollar bounces back despite weak CPI reads, Japan's growth accelerates
USD gives up gains amid soft CPI print
The US dollar came under renewed selling pressure on Friday amid a soft CPI report. Headline CPI printed at 1.7% y/y, while the market was expecting a reading of 1.8%. The core gauge, which excludes the most volatile components, held steady at 1.7%, matching expectations. The report is definitely not a game changer as weakening inflation pressures are no secret. However, this is another warning bell that is calling the Fed to take it easy with tightening.
The minutes of the July’s FOMC meeting are due for release this Wednesday and they’ll likely show that anemic inflation pressure has kept Fed members on their toes. We do not expect the monetary institution to lift borrowing rates in September, rather wait for December. However, Yellen will certainly give further details because of the balance sheet run-off. This could be as good a time as any to set a hard date for the kick-off.
EUR/USD bounced as high as 1.1847 on Friday afternoon and has stabilized at around 1.1820 since then. July’s retail sales are due for release today. Headline gauge is expected to have risen 0.4% m/m compared to a contraction of 0.2% in the previous month, while sales excluding auto and gas should increase 0.4% m/m, compared to a decrease of 0.1% in June. A solid print of those indicators could ignite a dollar recovery as it would bode well for the US consumption and to some extend inflation.
Japan GDP growth beats expectations
Japan’s growth came in much higher than forecasted at 1% q/q versus 0.6% for the second quarter. Looking back, this release is the best data in the last two and a half years. It also represents the sixth consecutive quarter of positive GDP growth.
Consumer spending has largely improved and helped spur on the good data. Indeed, spending rose 0.9% from Q1 and beat the estimate of 0.5% for the quarter. Consumer spending has traditionally been the weakest point of the Japanese economy. This is maybe changing, but a string of data will be needed to confirm this trend.
Recent fundamentals are good news for the Bank of Japan, which is still the only major central bank not able to hint about further tightening. For the time being, good numbers must at some point translate into inflation. Nationwide inflation stands at 0.4% y/y – way below the inflation target of 2% – and this despite the country’s Abenomics policies and massive quantitative easing. The BoJ monetary policy still cannot be considered as a success. The only true gains have been in stock market, where the Nikkei 225 increased by 16% over the last 12 months.
Currency-wise, the yen is weakening against the dollar and remains under pressure for further appreciation. Geopolitical tensions and market uncertainties may trigger a risk-off move towards yen again. This is the curse of being a safe haven.