Day two

Fed Chair Janet Yellen will take the podium for the second and final day of her congressional testimony. Investors interpreted her comments yesterday as broadly dovish, pushing the US dollar lower. USD has picked up slightly this morning, but remains vulnerable to Yellen’s forthcoming commentary.

Yellen said the economy is strong enough for the Fed to begin winding down its massive bond portfolio this year, although we still don’t have an exact date for when this will take place.

Despite her verbal support of another rate hike and winding down the balance sheet, there was a pronounced air of caution in her remarks. Yellen emphasized that inflation is below the Fed’s target. This has been a longstanding concern for policymakers, and this particular “uncertainty” could very well affect monetary policy.

This makes Friday’s CPI inflation figures all the more significant. Investors will take this as a barometer of the outlook for the rest of the year and the potential impact on Fed policy.

US producer prices rise unexpectedly

Headline producer prices in the US went up 0.1% in June after being left unchanged in May; markets were expecting a 0.1% drop. Prices for goods edged up 0.1% after falling a month prior. Food prices climbed 0.6% while cost of energy fell 0.5 percent.

Core prices excluding food and energy missed slightly. Prices for services advanced 0.2% in June marking the fourth consecutive increase. An annual reading of 1.9% was just below the 2% expected and down from the 2.1% increase in May.

Not a lot of reaction for the dollar as this is second-tier data. Inflation tomorrow will be a weighty indicator to watch, given recent Fed comments about the uncertainty surrounding inflation growth in the US.

Take a hike

The Bank of Canada hiked its benchmark overnight interest rate up to 0.75% yesterday, in line with investor expectations. It’s the first hike in seven years, and robust domestic growth allowed the BoC to look past slowing inflation and make their move.

Further positive data should keep CAD buoyant heading into heavy US data tomorrow. The Canadian housing market continues to look strong. New home prices rose 0.7% in May from the month before – investors were only expecting a 0.3% gain.

USDCAD isn’t moving much on the news, but the echoes of a rate hike are underpinning the Canadian dollar for now. We would expect to maintain these levels until tomorrow’s release of US CPI and retail sales.

EURUSD: Euro is being sold this morning with no data releases or headlines behind it, just some positioning ahead of tomorrow’s US data release.

GBPUSD: Sterling enjoying a weaker dollar. Prime Minister May gave an interview on BBC radio this morning, but refused to give a timetable for the UK’s departure.

AUDUSD: Aussie dollar higher after China’s trade surplus grew to $42.77 billion in June thanks to larger exports to the US and EU.

USDCAD: Canadian dollar still flying high after the Bank of Canada’s rate rise yesterday.

USDJPY: Yen weaker against the dollar this morning after a mixed report on consumer prices pushes all eyes to Friday’s data stream.