US Dollar Down Ahead of Yellen; Sterling Falls on Inflation

USD

The U.S. dollar is slightly weaker across the board, except versus the British pound, on reporting from the Wall Street Journal. The Journal reports that the White House is “exploring a new tactic to discourage China from undervaluing its currency to boost exports.” The plan seems to be to designate the practice of currency manipulation as an unfair subsidy when employed by any country, instead of singling out China by name. Whether the policy comes to fruition or not, it is another sign that the Trump administration favors a weak dollar.

The greenback could also be affected by political pressures following the resignation of National Security advisor after only 24 days on the job. Some expect a deeper investigation into ties to Russia, which would put pressure on the Trump administration. On the upside for the new administration, Steven Mnuchin was confirmed as U.S. Treasury secretary.

The greenback is trying to recoup some of its overnight losses in early trading after a report showed that producer prices rose more than expected in January. The so-called core PPI reading rose 0.4%, higher than the 0.2% expected by economists.

Attention will now shift to Janet Yellen’s bi-annual testimony before Congress. The Fed chief will begin speaking to the Senate Banking Panel at 10 a.m. Eastern. We expect her to maintain her stance that “gradual” rate hikes will be appropriate in the future.

 

EUR

The Euro is slightly stronger against the U.S. dollar despite the release of disappointing European growth data. The Euro-area as a whole grew 0.4% in the 4th quarter compared to a preliminary reading of 0.5%. The slight downtick can be attributed to smaller-than-expected expansions in Germany and Italy.

Nevertheless, the common currency is within a few tenths of a percent from its weakest level in a month against the U.S. dollar, a level it touched during yesterday’s session.

 

GBP

The British pound fell nearly half a percent against the U.S. dollar and is down across the board after a reading of inflation registered lower than expected. Annual consumer prices climbed 1.8%, failing to meet forecasts of 1.9%, according to the Office for National Statistics. Price pressures have spiked recently but remain under the Bank of England’s 2.0% target. A higher inflation reading would have put pressure on the central bank to consider raising interest rates sooner.

But the lower reading this morning will give the Bank some reprieve, hence the weaker sterling. Indeed, probability the Bank of England will raise rates this year fell to 23%, compared to 49% on February 2nd.