US dollar sinks to 10-month low

The US dollar is getting pommeled this morning, largely thanks to another failed attempt to repeal and replace Obamacare. Republicans lost their majority needed to pass the bill after two more senators came out against it.

But all may not be lost. Senate majority leader Mitch McConnell is now discussing passage of a repeal bill on its own. It would come with a two-year delay to give lawmakers time to draft a replacement. But with deep divides within the Republican party, a bipartisan effort may be the only solution to defeat what is shaping up to be the most unproductive Congress in 164 years.

With little on the calendar to provide some reprieve, we could continue to see a depressed USD through the rest of the week. The dollar has retreated from a four-month high against the yen to trade in the low 112s, and euro has climbed into the high 1.15s against the greenback as losses bleed across most of the currency space.

Looking ahead, the House has just proposed a new budget. If this gains traction, it would raise hopes of tax reform which would be a dollar positive.

Hopes of a BOE rate hike dashed

UK inflation unexpectedly slowed in June, stepping down from a four-year high in May. At 2.6 percent, it was the lowest inflation rate in three months and below market expectations of a 2.9 percent gain.

Brexit left a much weaker British pound, which in turn caused inflation to march higher. This has been weighing on consumers who are also struggling with sluggish wage growth. While prices are still outpacing wages, lower inflation will ease the pressure on policymakers to step in.

While 2.6% is still above the Bank of England’s two percent inflation target, this makes a rate rise much less likely. Consequently, we are seeing a weaker pound.

Aussie dollar flies to 2-month high

The Reserve Bank of Australia (RBA) meeting minutes were more positive than expected, propelling the Australian dollar to a two-year high against the USD.

Policymakers took an optimistic view of the economic outlook; a marked divergence from the dovishness that market participants were expecting.

Investors took a discussion on the neutral interest rate as a further positive signal from the central bank. Revising down their estimate of the neutral rate from around 5 percent to 3.5 percent, markets are taking this as an indication that the RBA is preparing for a rate hike.

The RBA did note that they will be closely watching housing and labor markets, putting a hyperfocus on Thursday’s round of Australian employment data.

EURUSD: Euro climbing steadily against the USD as the healthcare bill was defeated in the Senate.

GBPUSD: Sterling one of the few currencies where the US dollar isn’t bursting at the seams. Inflation came in lower than expected in June, deflating hopes of a rate rise from the Bank of England.

AUDUSD: Aussie dollar at more than a 2-year high against the greenback after the RBA signaled that it might be ready to raise rates.

USDCAD: US dollar slightly lower against the loonie as talks of renegotiating NAFTA heat up.

USDJPY: The yen taking a leg higher against the US dollar. USDJPY down two cents from the 4-month high we touched last week.