The dollar has started the second half of the year with the confidence that was expected in the first half. Of course it’s early days, but we did see the 6-month average on the headline rate move to the highest level (231k) seen in the post-crisis era. The data will give the Fed confidence to continue the strategy of steady tapering of bond purchases. But as we mentioned at the start of the year, this does not necessarily translate into a substantially stronger dollar, because rates are still going to remain near to zero this year.
US markets are closed today for Independence Day, so in all likelihood we will see lower volatility than normal for a Friday. Sterling was notable yesterday for its continued resilience in the face of the stronger dollar, having hit a new multi-year high at 1.7180. EURGBP moved down for a fifth consecutive session yesterday, making an overnight low of 0.7919. The technical indicators continue to suggest sterling is vulnerable to a correction, but for now they are being ignored. This remains the background risk, especially at the end of the week.
The euro was naturally the more vulnerable currency yesterday in light of the latest comments from ECB president Draghi, who reiterated that rates were set to remain low for a considerable period and that discussions on asset purchases were continuing. The effect was to dampen the single currency in a broadly dollar positive environment, but in essence there was nothing fresh in his comments to elicit a substantially weaker tone.