CURRENCIES: Dollar Stronger As Economic Data Beats Expectations

Pound slides as U.K. inflation stalls

The U.S. dollar strengthened on Tuesday after economic data, including July retail sales, beat expectations and cast the U.S. economy in a relatively favorable light. The greenback retreated slightly from its gains against its main rivals as the day went on, but broadly finished the day up from Monday.

The ICE U.S. Dollar Index , which measures the greenback against a basket of six currencies, was more or less flat in the afternoon, reading 93.8170, down from its initial spike to 94.0370 earlier in the day, but still higher compared with 93.7920 before the data releases.

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

The dollar rose to Yen110.61 on Tuesday, up from Yen109.63 on Monday.

Tuesday's reported data included retail sales that came in 0.6% on the month, or 0.5% up when excluding fuel, and matching expectations. Meanwhile, the Empire State Manufacturing Index, measuring business conditions in the New York region for August, read 25.2 -- its highest reading in almost three years (http://www.marketwatch.com/story/empire-state-factory-index-throttles-to-highest-in-nearly-three-years-2017-08-15) -- compared with an expected 11, and 9.8 in the prior month.

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

"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.

Minutes from the policy-setting Federal Open Market Committee's meeting are due to be published on Wednesday afternoon. Details on an unwinding of the Fed's balance sheet or a continuously hawkish tone could give the buck yet another boost, market participants said.

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 $1.2869, slightly lower than its high of $1.2971 earlier in the day and $1.2964 late Monday in New York. Against the euro, the pound stood at EUR1.0959, compared with EUR1.1004 late 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 mark, 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 2016, 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 16, 2017 06:00 ET (10:00 GMT)