Dollar Pares Drop, Heads for Biggest Weekly Gain Since February

  • Yen falls against all G-10 peers as missile fatigue sets in
  • Hurricane distorts factory data; inflation expectations rise

The dollar more than halved its daily loss and was on track for the strongest weekly advance since February, as investor focus began turning to next week’s Federal Reserve policy meeting.

The Bloomberg Dollar Spot index was down 0.2 percent on the day after earlier losing almost 0.5 percent following disappointing retail sales and industrial production data. For the week, the greenback was still up about 0.6 percent, recovering nearly half of last week’s loss. The pound was the big winner for a second day as U.K. policy makers continued to beat the drum for a near-term rate increase, while the yen was the biggest loser.

  • U.S. August retail sales fell 0.2% overall and 0.1% ex-auto and gasoline vs expectations for modest gains. Hurricane Harvey dented activity in Texas and Louisiana, an impact that was evidenced by a decline of 0.9% in August industrial production, with the Fed estimating that the hurricane accounted for about 0.75% of the drop. University of Michigan consumer sentiment fell to 95.3 vs estimates for a steeper decline. Notably, consumer inflation expectations rose from the prior month, which may be seen by Fed policy makers as an encouraging sign
  • The FOMC meets next week and is widely expected to announce the start of the unwind of its balance sheet. While a change to rates isn’t anticipated, the Fed may leave the door open for another rate hike this year. Market-implied odds for a hike by the end of 2017 are approaching 50% after dropping below 30% last week
  • In Friday trading, the pound gained again as BOE policy maker Gertjan Vlieghe, usually on the dovish end of the central bank’s spectrum, said that he backed the bank’s decision Thursday to flag the likelihood that interest rates may rise in coming months. Sterling climbed to its highest level vs the dollar since the Brexit vote in June last year
  • GBP/USD was trading around 1.3570 vs a session high of 1.3616. GBP demand on the day has been fueled by model-driven funds adding to GBP longs and by real-money players rushing to reset hedges on short-sterling trades in the wake of the unexpected shift by the BOE. Traders are now discussing technical targets near 1.3750 or 1.3800
    • The pound has risen 2.8% vs the dollar this week, and has gained against all of its G-10 peers over the past five days
  • With the dollar broadly defensive, the euro gained passive support after ECB’s Sabine Lautenschlaeger said that now is the time for policy decisions on slowing asset purchases or exiting other unconventional measures that have helped support the euro area economy
  • EUR/USD was trading near 1.1938 vs session high 1.1987 reached after the U.S. retail sales data. Offers to sell EUR are likely in place of 1.2000, where a large option expiry rolled off Friday. Ahead of the data, EUR rose quickly through 1.1970, with price action suggesting a few stop-loss buy orders may have been tripped. Stops had been reported near that level Thursday
  • USD/JPY was trading around 110.90 after after climbing as high as 111.33 in European trading. While JPY gained briefly overnight after North Korea launched another missile, investors quickly seized on the USD dip to add fresh dollar longs, traders in Asia said. The pair was also supported by cross demand, especially against GBP. Focus was on the monetary policy divergence between the BOJ and its major G-10 peers. The BOJ continues to anchor rates near zero in an effort to tackle deflation, while peers such as the BOE, the BOC, the ECB and the Fed are embarking on measures to reduce or withdraw monetary stimulus, keeping the yen at a disadvantage
    • JPY is down vs all of its G-10 peers this week after risk sentiment revived, with losses of nearly 6% against GBP and 3% vs USD
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