This week, the US dollar did not change much against a basket of its major peers, as investors shifted their focus toward minutes of the Fed’s previous meeting and US retail sales data due on Wednesday.
The bounce back
Last week, the US dollar had declined to lows of six weeks, but the currency has managed to bounce back since then, as investors are now betting that the US Federal Reserve is not likely to stop.
This is because inflation in the United States continues to stay persistently high, which will not deter the Fed from their aggressive monetary policy tightening path.
However, trading has remained choppy, as the US central bank is not due for a meeting until September 20th. Before then, there will be additional jobs and consumer price inflation data due.
The 10-year government bond yields have stayed below 3% and there has been an improvement in the stocks and credit markets.
These looser financial conditions have prompted speculation that the US Fed may actually have to be even more aggressive when it comes to hiking interest rates in order to combat the price pressures.
Fed in focus
According to market analysts, every time US equities rally, it provides the Fed with more leeway in tightening monetary policy.
They also said that the financial conditions were once more returning to where they had been back in April, before the US central bank had increased the interest rates by almost 200 basis points.
This means that the central bank would now once more be back at square one, despite tightening its monetary policy aggressively.
Analysts said that the trend needs to reverse, or else the Fed would have no option but to get tougher.
Investors will now be going through the minutes of the Federal Reserve’s July meeting that are due on Wednesday for clues about the kind of rate hike to expect in September.
There is currently a 60% probability priced in for a 50 basis points increase and a 40% probability for a 75 basis points increase.
On Wednesday, the retail sales data is also due and this will also provide some new insights into the consumer’s state.
It is expected to indicate a 0.1% increase in US retail sales in July, as compared to the same numbers in June.
On Tuesday, data showed that US homebuilding had fallen to their lowest value in July in almost 1.5 years, primarily because of the rising prices of construction materials and high mortgage rates.
Meanwhile, industrial production in July had climbed to an all-time high. There was a 0.02% rise in the US dollar index, as it reached 106.48.
The euro had recorded declines earlier after data showed a drop in German investor sentiment in August because of the impact on private consumption of the cost of living.
But, it rose back up to enter positive territory. Europe is currently dealing with an energy crisis, after it imposed sanctions on Russia for its Ukraine invasion.