Major Currency Pairs Analysis: August 14, 2013

The euro fell to one-week lows against the broadly stronger dollar on Tuesday as U.S. retail sales data reinforced the view that the Federal Reserve will soon start to phase out its stimulus program. The euro briefly touched session highs earlier Tuesday after a report showed that the closely watched ZEW index of German economic sentiment rose to a five-month high of 42.0 in August from July’s reading of 36.3. Economists had forecast a reading of 40.0. The index of the current economic situation for Germany rose to a one-year high of 18.7. Meanwhile, the index of economic expectations for the euro zone was also higher, increasing to 44.0, the highest since April 2010, up from 32.8 in July. The report said the first signs of an end to the recession in major euro zone countries had contributed to the increase. A separate report showed that industrial production in the euro zone rose 0.3% in June from a year earlier, more than expectations for a 0.2% increase.
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GBP/USD
The pound was almost unchanged against the dollar on Tuesday after official data showed that U.S. core retail sales rose at the fastest pace in seven months in July. The data reinforced the view that the economic recovery is strong enough for the Federal Reserve to begin phasing out its asset purchase program later this year. Earlier Tuesday, official data showed that the rate of consumer inflation in the U.K. eased in line with forecasts in July. The Office for National Statistics said consumer price inflation ticked down to 2.8% on a year-over-year basis, in line with economists’ expectations, from 2.9% in June. Core CPI, which excludes food, energy, alcohol, and tobacco costs rose by a seasonally adjusted 2% in July, below expectations for a 2.3% increase. Investors were looking ahead to U.K. employment data on Wednesday after the Bank of England announced plans last week to keep interest rates on hold at record lows as long as the U.K. unemployment rate remains above 7%.
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USD/JPY
Earlier Tuesday, the Economic and Social Research Institute said that Japan’s core machinery orders fell 2.7% last month after a 10.5% rise in June. That was better than the 7.2% contraction analysts expected. On Monday, a report showed Japan’s second-quarter GDP grew less than expected. In a report published earlier Monday, data showed Japan’s second-quarter GDP grew 2.6%, well below the growth rate of 3.6% economists expected. The first-quarter growth rate was revised to 3.8%. "As for the outlook, personal consumption is expected to continue rising moderately. But given capital investment is weaker than personal consumption, we must support a recovery in capital expenditure," said Japanese Economics Minister Akira Amari in a statement. In a separate report, the Bank of Japan said that Japan’s Corporate Goods Price Index rose 2.2% in July after a 1.2% increase in June. Analysts had expected Japan’s Corporate Goods Price Index to rise to 1.9% last month. The weaker yen helped Japanese equities to a leadership role in Asia Tuesday with the Nikkei 225 surging 1.38%.
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USD/CAD
The U.S. dollar rose to session highs against the Canadian dollar on Tuesday after official data showing that U.S. core retail sales rose at the fastest pace in seven months in July reinforced the view that the Federal Reserve will soon start to unwind its stimulus program. The Commerce Department said core retail sales, which exclude automobile sales, rose 0.5% in July, compared to forecasts for a 0.4% increase. Core retail sales for June were revised up to 0.1% from a flat reading. Overall retail sales rose by a seasonally adjusted 0.2% last month, missing expectations for a 0.3% increase. Retail sales figures for June were revised up to a 0.6% gain from a previously reported increase of 0.4% the report said. The data added to the view that the economic recovery is strong enough for the Fed to begin phasing out its asset purchase program later this year.
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