FX Market View #20: Dollar Rally’s On Inflation And Retail Sales Data

The Dollar rally’s against all major currencies last week apart for the Yen, to break the resistance it faced earlier in the month. A contributing factor towards the slight rally in Yen is put down to the BOJ tweaking its macro forecasts during Friday’s meeting. In effect, the Japanese central bank will be reducing its asset purchasing program. As for the Dollar’s recent rise, it was the unexpected jump in inflation data and retail sales which prompted this trading environment. However, the fact that US yields softened as an outcome is more of a surprise. The current counter-intuitive relationship between the greenback and yields seen so far this year, appears to be remaining.

Looking ahead into the summer period, the economic impact of the Delta mutation of the corona virus is taking the forefront. Concerns are developing in the equity markets whether this variant could be the cause to partially or fully close economies again. This potential reverse in momentum behind the global economic recovery can be halted or at worse even reversed. Consequently, the appetite for risk assets has taken a hit with most market indices trading lower. In this situation the Dollar has been trading higher, benefiting from being the go-to currency as markets seek safe haven investments. Modest gains are also seen in Yen and Swiss Franc, other safe haven currencies.

The major economic event for this week will clearly be the ECB meeting on Thursday. Markets are not expecting hawkish views for the ECB, as we factor in the case that the Eurozone has not experienced strong inflationary pressures. Therefore it will be doubtful to hear any rhetoric on monetary easing by the ECB, unlike the situation seen in the US over the past few months. This will reduce the possibility of any upside potential in the common currency gains. Other notable events will be the meeting of the central banks of China and Australia on Tuesday, as well as the services and manufacturing data from the UK and Germany being released on Friday.

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