Treasury yields traded sharply higher on Monday ahead of the Federal Reserve’s monetary policy announcement. The 2.7% rally in 10-year yields and decline in the Dow Jones Industrial Average reflects the market’s belief that the central bank will begin discussions about reducing purchases this week. Typically, taper talk coincides with broad-based U.S. dollar gains, but the greenback was unchanged against sterling and lost value against the euro, Canadian, Australian and New Zealand dollars. USD/JPY broke through 110 and USD/CHF knocked against 90 cents, but the lack of consistency in the U.S. dollar’s overall performance suggests that not everyone is convinced that the Fed is ready to send yields higher with less dovishness. It has plenty of other opportunities to signal the change to the market, including its August Jackson Hole conference or the September FOMC meeting. Still, if U.S. yields maintain their strength into Wednesday’s rate decision, the euro, sterling, Aussie and other currencies should trickle lower.
Tomorrow’s U.S. retail sales report should play a big role in setting expectations for the monetary policy announcement. Despite the U.S. dollar’s gains, economists are looking for retail sales to fall by 0.8% in May after stagnating in April. Two back to back months of weak consumer demand combined with two months of subpar job growth are compelling reasons for the Fed to be more patient. Expect a lot of position adjustments and U.S. dollar volatility after the retail sales report.
It is official – the UK’s final phase of easing lockdown restrictions will be delayed by four weeks to July 19, according to Prime Minister Boris Johnson. With the Delta variant of the coronavirus driving new cases to their highest levels since February, the government wants to accelerate the vaccination effort before “Freedom Day,” particularly second doses for those over 40 years of age. Vaccines are proving effective against variants, but Johnson said the data is now clear that two doses are needed to combat the Delta variant. Sterling took the news well, barely budging after the announcement, but the subdued performance of GBP/USD suggests that momentum is to the downside. The main focus is on the U.S. dollar this week, but a busy data calendar ensures that sterling will also be on the move. UK labor market numbers are due for release tomorrow and, according to PMIs, there was a marked improvement in labor market growth. Very strong numbers will be needed to shake the pressure off sterling.
Stronger than expected Eurozone industrial production numbers helped EUR/USD hold above its 50-day SMA. The New Zealand dollar shrugged off weaker service sector activity. The Canadian dollar rallied despite downward revision to manufacturing sales.
The RBA releases the minutes from its last monetary policy announcement tonight. The RBA maintained its dovish bias because of mixed data, so investors will be looking at the minutes carefully for any insight into how long the central bank expects data to remain subdued.