The dollar gained across the board after Fed Chair Janet Yellen’s slightly hawkish comments on the US economy and indicated that the Federal Reserve is on course to raise interest rates this year. She said that if the economy evolves as the Fed expects, economic conditions would likely make it appropriate at some point this year to raise the federal funds rate. Despite some recent weak data and still some labor market slack, Yellen indicated that the weakness was attributed to transitory factors that will disappear soon.
The dollar hit a three-week high against the yen in reaction to the comments and reached 123.87. Adding to positive sentiment for the dollar was some upbeat US producer-price index (PPI) data which showed wholesale prices in the US rose more than forecast in June. The 0.4% increase in PPI followed May’s 0.5% increase.
The stronger dollar pressured an already falling sterling under more pressure. Cable fell to 1.5583, after peaking at 1.5674 earlier in the day. Disappointing UK employment data was the first catalyst for the pound’s move lower. The claimant count rose by 7,000 instead of falling by 9,000 as the market expected and the unemployment rate rose to 5.6% from 5.5%. But the focus was on the average weekly earnings which were below forecasts. Average weekly earnings rose to 3.2% in May from 2.7% in April – the highest figure since April 2010, but below estimates of 3.3%.
The euro fell back below the key psychological level of 1.10 and reached as low as 1.0949. The broadly stronger dollar led the push lower but also there is risk ahead of the Greek parliamentary vote tonight in Athens where pension and tax reform measures have to be passed by midnight as part of the conditions for a bailout package of as much as 86 billion euros as agreed at Monday’s EU Summit. Although Tsipras is likely to suffer defections from his Syriza party, it is expected that there is still a comfortable majority and support from main opposition parties to approve the measures. Meanwhile, capital controls remain in place but following the Greek parliamentary vote, the ECB will meet to discuss emergency liquidity (ELA) then banks can re-open with new liquidity provisions. The ECB monthly policy meeting also takes place tomorrow.
The Canadian dollar weakened on news that the Bank of Canada cut the main interest rate to 0.5% from 0.75%. This was in line with consensus but the US dollar surged against the loonie to a fresh six-year high of 1.2923 from 1.2791 before the rate announcement.