Good morning,

Dollar dances higher

The US dollar posted fresh four month highs yesterday as the US data picture continued to show a steel that has been missing for most of this year. Last week’s retail sales, industrial production and consumer confidence numbers were all positive and the June payrolls released earlier in the month went a long way to reassuring investors that recent weakness in jobs growth should be a blip.

Yesterday saw the announcement of some great US housing numbers with housing permits, new home starts and completions all running higher. The outlook for US housing remains decent and as long as the tightness in the US labour market translates into higher wages, then ultra-low interest rates will spur further property purchases.

Are Fed rate rises badly priced?

Rate expectations in a post-Brexit world are a difficult beast. Markets are currently only pricing in 18bps of hikes from the Federal Reserve in the next 12 months; a number that looks very cheap given the recent run of US data. That ascribes a 44% probability of a hike in interest rates by the end of the year and while the Federal Reserve has been quick to find the grey cloud amongst the silver linings we have to think that should the US data picture continue to look as rosy as it does at the moment then we can look for a cheerful return to higher rates in the US sooner rather than later.

UK inflation not a factor yet

The UK is one place where a cheerful return to higher rates would not be welcome despite a slightly higher than expected inflation measure yesterday. CPI rose to 0.5% on the year but given the data was from before the Brexit vote there has been a limited follow through into the pound. As we stated yesterday, higher inflation is set to come down the track later in the year as producers and retailers respond to a falling pound and pressures on margins but we have to believe that the Bank of England will look through any spikes in inflation and costs in a bid to be growth and credit supportive, as they did during the Global Financial Crisis.

Airfares rose by 11% in June according to the ONS as airlines took advantage of football fans going to France to support one of the premature exits from Europe England has suffered this year. The travel industry will be a useful bellwether for consumer spending moving forward as any weakness in the pound may preclude higher ticket prices for low-cost carriers.

Today’s jobs report is similarly pre-Brexit but we will be looking to see whether wage increases were pared back or employment gains slowed in the lead-in to the vote. Unemployment will be one of the key Brexit barometers as to business reaction; have pay packets been damaged and employment contracts delayed? It will take a few months to come through.

China pulls yuan back

The fix of the Chinese yuan was the main news overnight. The strong USD opened the Asian session and pushed emerging market currencies lower with many market participants expecting the People’s Bank of China to fix USDCNY for the day above the important psychological market of 6.70.

They didn’t and this has raised concerns that the authorities in China will now return to a policy of supporting the yuan as opposed to letting it weaken as it has for the past four weeks. 6.70 is a line in the sand it seems.

Elsewhere the data picture is rather quiet.

Have a great day.

Click here for live rates