CURRENCIES: Dollar Strengthens Further As Economic Data Beats Expectations

By Sara Sjolin, MarketWatch , Anneken Tappe Features Dow Jones Newswires

Pound slides as U.K. inflation unexpectedly stalls

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The U.S. dollar strengthened this morning after economic data, including July retail sales and the Empire State Manufacturing Survey, beat expectations across the board, casting the U.S. economy in a relatively favorable light.

Retail sales came in 0.6% on the month, compared with 0.4% expected, or 0.5% up when excluding auto fuel matching expectations. Meanwhile, the Empire State Manufacturing Index, measuring business conditions in the region for August, read 25.2, compared with an expected 11 and 9.8 in the prior month.

June business inventories also came in stronger on the month, recording a 0.5% increase compared with 0.4% expected and 0.3% previously.

The ICE Dollar Index , which measures the greenback against a basket of six currencies, is 0.5% up at 93.9020, retreated from its initial spike to 94.0370 following the data releases but still showed a gain, compared with 93.7920 before the release.

In lockstep, the euro clawed back some of its losses and is 0.4% down at $1.1736, compared with $1.1702 after the reports were released.

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"Any rebound of such magnitude will be seen as a relief and could carry dollar-yen through the 111.00 level, but if the data misses the mark again--or, worse, prints negative, the pair could once again tumble toward 109.00 as the day proceeds," said Boris Schlossberg, managing director of currency strategy, at BK Asset Management, in a note before the data release.

The dollar rose to Yen110.41 on Tuesday, up from Yen109.63 on Monday.

The U.S. currency also continues to benefit from abating fears about a military showdown between the U.S. and North Korea. Tensions eased further on Tuesday after North Korean leader Kim Jong Un decided not to launch a missile attack on U.S. territory Guam (http://www.marketwatch.com/story/north-korea-steps-back-from-plan-to-launch-missiles-at-guam-2017-08-14), according to state media.

The pound, on the other hand, tumbled on Tuesday after U.K. inflation came in softer than expected, quelling some concern that the Bank of England would soon raise interest rates.

Sterling bought $1.2861, down from as high as $1.2971 earlier in the day and $1.2964 late Monday in New York. Against the euro, the pound stood at EUR1.0955, compared with EUR1.1004 late on Monday.

From a technical perspective, the outlook for the pound-dollar pair is beginning to look more bearish than bullish given that the currency has dropped below the psychological $1.30 handle, Fawad Razaqzada, market analyst at Forex.com, wrote earlier today. Breaking through the $1.30 technical barrier could turn the sentiment bullish again, he speculated.

The downbeat mood came after the Office for National Statistics said British inflation remained unchanged at 2.6% in July (http://www.marketwatch.com/story/uk-consumer-inflation-remains-at-26-in-july-2017-08-15). Analysts had expected a 2.7% reading. Consumer prices in the U.K. have moved rapidly higher since the Brexit referendum in June last year, as the drop in sterling has made imported products more expensive.

Inflation rose to a four-year high of 2.9% in May, but has since cooled a little.

July's data are a "decent way away from the 2.9% reading seen in May. And given that the Bank of England didn't pull the rate-hike trigger at that level, they're not going to do it for anything lower, helping to explain why the pound found itself in such a bad mood once the figure was released," said Connor Campbell, financial analyst at Spreadex, in a note.

Elsewhere in Europe, the German Constitutional Court passed on a case against the European Central Bank, alleging that its quantitative easing program oversteps its mandate, to the European Court of Justice. The central bank's public sector purchase program is in question because it might violate the ban on monetary budget financing. Germany's court said there were reasons to believe a violation took place, according to a statement (http://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/EN/2017/bvg17-070.html).

"If the court rules that the ECB is violating the ban [...] that would be huge," Razaqzada added. "It would have a significant impact not just on the euro but on stocks as well."

See:MarketWatch's economic calendar (http://www.marketwatch.com/economy-politics/calendars/economic)

(END) Dow Jones Newswires

August 15, 2017 13:29 ET (17:29 GMT)