Ole Hansen
The US dollar is not the only catalyst in gold’s movement, explains Saxo Bank head of commodity strategy Ole Hansen.
Article / 18 August 2016 at 5:04 GMT

3 Numbers: Fed’s Dudley, take two, on rate-hike odds

Blogger / MoreLiver's Daily
  • Have UK retail sales held up after the Brexit referendum?
  • Euro area inflation remains low – the ECB will address this
  • US Federal Reserve’s William Dudley speaks again after earlier 'hawkish' comments

By Juhani Huopainen

UK July Retail Sales (0830) Retail sales in July are expected to remain unchanged from June and 4.2% higher than a year ago. Recent surveys of large retailers suggest sales have held up well in July, and it is feasible that a monthly increase will be posted.

 Today's UK retail sales data will provide some of the first evidence on whether the Brexit vote has hit the economy. Photo: iStock

The consensus around the UK’s vote on the Brexit referendum is still relatively unchanged: The decision to exit the European Union will be relatively bad for the economy, but the damage will be limited by easier monetary and fiscal policy, leading to a weaker GBP. Overall, the negative Brexit effects will be mostly contained in UK, and the rest of Europe will not be hit hard.

But what if that consensus narrative is flawed, and the economy is not about to be hit?

The latest unemployment data showed the number of benefit claimants falling in July. Housing prices have not fallen drastically in July and the only really negative effect thus far has been the plunge in the purchasing manager indices.

It could be argued that the purchasing manager indices just indicate temporary business fears, as investments are on a pause and inventories are kept small. If nothing bad happens, business sentiment might improve quickly.

The retail sales data today is one of the first “hard” pieces of data on whether the Brexit is really having a negative effect on the economy. If retail sales have performed well, the crowded short GBP trade could be reversed, and GBPUSD might move towards the higher end of the post-referendum range. Watch the 1.3050-1.31 resistance.

GBPUSD chart

 Chart source: SaxoTrader

Euro area July Consumer Price Index (0900). The consensus forecast for July prices is pessimistic. The consumer price index (CPI) is expected to have fallen by 0.5% and core CPI by 0.7% from June. From a year ago, the CPI would still be up 0.2% and core CPI 0.9%.

Chart source: Saxo Bank

The European Central Bank is widely expected to begin reassessing its policy stance at its next meeting on September 8, but the first policy hints will probably come from the Jackson Hole symposium one week from now. A consensus is beginning to form that increased fiscal spending is the next step.

US Federal Reserve’s Dudley speaks (1405). The Federal Reserve Bank of New York’s president and vice-chairman of the Federal Open Market Committee, William Dudley, will be speaking today, and also answering questions from the press.

On August 16 Dudley said a hike in September was “possible”, which led to some USD buying and higher US bond yields. Reading beyond the headlines, all Dudley said was that if data warrants a hike, a hike is a possibility.

This was followed by minutes of the FOMC’s July meeting, which left rates unchanged and slightly altered the language to a more hawkish direction. The minutes revealed that the FOMC members disagree on whether a hike soon is warranted.

Investors will probably be wary of Dudley repeating his previous message, but more likely he will choose his words a bit better and emphasise that it all depends on the data. This could lead to more USD selling and lower yields.

The EURUSD’s rise has again taken it close to the top of the broad 1.05-1.15 trading range, where the pair has been stuck since February 2015. The chart suggests we might be able to climb from the current 1.13 level to 1.14, but investors are probably going to be wary of pushing for another test of the 1.15 level. Betting on a higher EURUSD is still sensible, but the scope for further gains is limited, and reversals tend to be quick and “surprising”. But aren’t they always?

S&P500 stock index and EURUSD, with the Dudley-spike and FOMC minutes:
Chart source: SaxoTrader. Create your own charts with SaxoTrader; click here to learn more 

EURUSD still has upside left, but the range's top is getting closer:
EURUSD Chart source: SaxoTrader

– Edited by Susan McDonald

Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform. 


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