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Rising US yields drive dollar higher.

By Jake Trask

UK wages are now officially outpacing inflation latest numbers showed yesterday boosting the spending power of UK consumers. Wages excluding bonuses are rising at 2.9% 3m/y with CPI from the comparable period rising at 2.7%. It’s likely we will see a further widening of the spread in coming months as sterling’s fall in value since the EU Referendum is washed out of the equation and it inflation heads back down towards the 2% target. Along with the wage number we saw the Unemployment rate hold at 4.2% indicating a still tight UK labour market. The response from the pound was mixed, rising against the euro which was sold off yesterday but dropping against the dollar which had another positive day across the board. GBP/USD currently trades around 1.35

The dollar bull-run continues to rumble on with the greenback posting more gains yesterday. Inflationary pressures in America are building with benchmark 10 year debt yields currently around 3.07% their highest level in around four and a half years. The rising yields replicate rising expectations of four Fed hikes this year with market data showing around a 43% chance of a June, Sept and Dec rise in rates by the FOMC. Adding upward pressure to the dollars move was a positive Retail Sales report for April with both the overall and core reading coming in at 0.3%. Although this fell short of expectations Marchs figures were revised upwards with the overall reading posting a very healthy 0.8%. The dollar is king at the moment and it seems there could be further for it to run.

The euro has seen a pretty steep sell over the past couple of months as the Eurozone economy cools after booming in 2017. Growth figures from Germany, the EZ’s powerhouse, showed a faster than expected slowdown to 0.3% for Q1 from Q4 2017’s 0.6% reading. Along with the soft growth print there was a negative German ZEW Economic Sentiment Survey result, the second in a row after a series of positive prints over the past 18 months. The main reasons for the decline were given as trade tensions between China and the US and the recent withdrawal by the Trump administration from the Iranian nuclear treaty. Today sees Final CPI y/y from the Eurozone with no change from 1.2% predicted. GBP/EUR is back under 1.14.

Rising US bond yields are adding downward pressure to the antipodean and Asian currencies at the moment as rising expectations of four hikes from the Fed lead investors to pull cash from EM/commodity currencies back to the US. The Aussie is back under 75 cents against the dollar not helped by a slightly soft quarterly Wage Price Index reading overnight. The print held at a downwardly revised 0.5% reducing pipeline pressure to CPI and therefore reducing the chances of a 2018 rate hike from the RBA. GBP/AUD is 1.8060.

After staging a fightback of sorts over the past few days, the loonie succumbed to the greenbacks advance with USD/CAD pushing back up through 1.29 yesterday before retracing back under. Despite Brent crude oil trading near its highest level since 2014 this is currently offering only limited support to the local dollar as USD marches on. There is little data of note from Canada today tomorrow so Fridays CPI number will be the next number in focus. GBP/CAD is around 1.7340.

Like the Aussie the Kiwi has retreated as USD has advanced over the past week with NZD/USD dropping below 69 cents where it was close to 74 cents a month ago. There has been little data of note from NZ over the past 24 hours however tonight sees the latest budget release with markets awaiting the latest fiscal decision from the Jacinda Ardern govt. GBP/NZD is at 1.9590.