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Good Economic Fundamentals for the US Elevate the Dollar

By OFX

The US Dollars advance steadied through trade on Wednesday as Investors looked to take stock and recoup profits following the early week uptick. Having touched three-week highs at 95.40, the dollar index edged marginally lower into the daily close ending the day just two-tenths of a percent higher at 95.08.

While edging upward against key counterparts in the Japanese Yen and Euro, the dollars drive came against traditional high yielding assets in the AUD, CAD, and NZD. Powell’s testimony supported the current path to monetary policy and calmed fears the Fed will need to alter its trajectory to combat hostile trade discussions fueling demand for the world’s base currency as the yield return edges beyond the traditional high yield partners.

US Economic data today posted better than expectation boosting the greenback higher against it G10 counterparties. The Philadelphia Fed Manufacturing Survey printed at 25.7 well above previous of 19.9 and consensus of 22.0. Also favoring the dollar was weekly initial jobless claims coming in under the expected 220k and posting 207k. Today's data will complete the economic releases for the US this week.

The loonie was able to outperform the USD by 0.2% with USDCAD closing at 1.3170 yesterday on the back of higher WTI oil prices, which were up 1.3%.

The CAD paired losses after being down 0.5% due to broad USD strength, which saw the USDCAD trading as high as 1.3260. But the USD reversed gains after the US housing starts data miss, broke back below the critical 1.32 level, and settled around 1.3170.

We continue to see short-term support/resistance levels for USDCAD at 1.3157 and 1.3289 respectively. It will be a big day tomorrow with the release of June's inflation numbers particularly given the fact that two out of the last three readings have failed to meet forecasts. Market participants will also be paying close attention to tomorrow release of Canadian retail sales figures for May.

The Euro lost 0.2% versus the dollar, closing around 1.1639 after trading as low as 1.1602. The Euro started the London session on the back foot and then extended losses as USD gained momentum across the board. Eurozone CPI data came as expected at 2% on the YoY basis, but it missed slightly on the core CPI reading, which printed at 0.9% (versus 1% expected).

The 1.16 level acted as good support, and the EURUSD was able to bounce from there after US housing starts data came much weaker than expected (-12.3% vs. -2.2% expected). The Euro pared losses and bounced back above 1.1650, then settling around 1.1640.

Support and resistance levels are stable at 1.1560 and 1.1661 respectively.

The pound suffered yesterday. GBP/USD hit lows not seen since September 2017 off the back of weaker than expected core inflation figures which in itself hit 15-month lows. So what drove sterling’s move, undoubtedly weaker inflation figures are better for UK households? Well, firstly the market was caught slightly unaware by the drop in the total CPI figure to 2.4% despite petrol prices hitting 4-year highs (maybe Elon Musk is rolling out more Model 3’s than analysts have realized). Secondly and more importantly the drop in inflation relieves some of the pressure on the Bank of England to raise their interest rates next month to 0.75% with market implied probabilities are dropping back to 73% from 84%. This author has long maintained that it would be more appropriate for the central bank to raise rates in February 2019 once Brexit details have become more evident but with GDP figures expected to bounce back the Bank of England may force over the proverbial edge.

Watch out today for retail sales figures for the UK, a number that has proved very volatile recently, as well as the ongoing Brexit battle.

The Australian Dollar appreciated against its US counterpart as optimism returned to the currency. Intraday trading told a different story however with the Aussie sliding to 0.7340, a 2-week low. As the day progressed, the Pair recovered strongly to touch 0.7409, riding the recovery in global risk sentiment. Changing hands this morning at 0.7398, the Australian Dollar looks to break and hold above the 0.74 handle with a keen eye on employment figures to provide the impetus.

The day was a story of two halves with the Asian session mostly subdued. Risk assets were whittled lower, including the Aussie, in the lead to Fed Chair Powell’s second testimony to the Senate. Fortunately for the Pair, Fed Chair Powell’s statement was mostly bereft of any new clues which saw risk-sentiment recover across the board. Equities and commodity currencies all posted positive gains and saw the Aussie in particular, recover steeply.

Moving forward, the domestic economic calendar has a little more to digest. Initially, all eyes are on Australian employment figures with the Australian economy tipped to add around 17,000 jobs. NAB is also looking to release their quarterly business confidence report, and the unemployment rate is due to stay steady at 5.4% today.

The New Zealand Dollar drifted off in domestic trading yesterday, continuing to trade off a poor reading at the latest GlobalDairyTrade auction and a continuation of US dollar strength. Opening the day at 0.6780 against the US Dollar, markets saw a sell-off into the close of play of 0.6740 with little macroeconomic data of note for the remainder of the week.

The majority of price action occurred overnight seeing close to a 1% rally off lows and the Kiwi testing the 0.68 handle and a high of 0.6803 overnight after risk appetite returned into both currency and equity markets.

Federal Reserve Chairman Jerome Powell testified on the Semiannual Monetary Policy report before the House Financial Services Committee in Washington overnight. Powell was buoyant in his remarks for the current state of the United States economy and is on track for gradual interest rate rises with the expectation still of two further hikes this year by the Federal Reserve. The New Zealand Dollar held steady in the North American session before retreating slightly lower to open at 0.6742 against its American counterpart.