A shift is happening in forex markets, one that is favouring the dollar as yields are pushed lower elsewhere and the US creeps towards a time when a rate increase will be more actively considered. More of this was seen overnight with the release of the latest FOMC minutes in the US, the tone of which was taken as modestly hawkish by markets. There was a greater discussion regarding the wording of the statement and the commitment to keep rates on hold “for a considerable time after the asset purchase program ends”. There was also a reflection of the better data and a sense that the Fed were more pre-disposed to react to this than was the case before. Behind the scenes, the US is commanding a decent yield premium against core Europe and broadly equal to yields in peripheral Europe, hence the growing underlying bid favouring the USD.
For today, we are seeing some partial reversal of dollar strength at the start of the European session, with cable nudging back towards the 1.66 level and EURUSD also finding a few pips on the back of the better than expected flash PMI data from the core Eurozone countries. We also have retail sales data in the UK, where stronger numbers could add some further upwind to sterling after the split MPC vote yesterday, but data can be volatile around this time of year (sales period) and more difficult to interpret for longer-term trends.
Looking ahead, note that Fed Chair Yellen speaks tomorrow at the Jackson Hole gathering and there are some thoughts that she may be less hawkish than the message from the minutes. That said, her record in guiding markets has not been that strong so far so she could well err on the side of caution and stick to the more academic, top down approach.