August 26, 2016 (Tempus Inc.) – As expected, volatility jumped sharply this morning as a plethora of risk events were on today’s schedule.
The U.S. GDP data showed the economy expanded at a 1.1% rate in the second quarter, right in line with expectations. The print was a slight decline from an initial reading of 1.2%, according to the Commerce Department. Personal consumption rose 4.4%, beating expectations of a 4.2% jump but has done little to spark a dollar rally.
But the Federal Reserve Chair Janet Yellen’s remark in Jackson Hole, WY gave the USD a major boost as she said that “the latest economic data strengthens the case for rate hikes”. Her speech was titled “The Federal Reserve’s Monetary Policy Toolkit.” Traders saw this as an opportunity for the central bank head to provide guidance on the Fed’s monetary policy plan moving into the final months of the year. Odds that the Fed will raise rates this year have risen to 57% from below 50% early last week as other monetary policy officials have signaled the economy is strong enough to withstand higher borrowing costs. However, some have warned that Yellen may just be discussing the arrows still in her quiver, and not necessarily that she has decided to use them.
The Euro fell against the U.S. dollar but remains withing recent range. The EUR/USD pair has been sluggish over the month as much of Europe is closed for the summer holiday season. Some have pointed to today’s speech by Janet Yellen as the end of the summer season and we did see volatility picking up. The European economic docket showed that consumer confidence in Germany and France registered slightly better than expected and Spanish retail sales ticked higher.
The British pound did not manage to finish off the week strong. The currency has gained against all of its 31 major peers this week and is set for its biggest weekly gain in a month versus the Euro. The sterling has benefited from a long string of strong economic data, beating expectations of a Brexit slump. Today’s data adds to the narrative. U.K. consumer confidence rose the month in more than three years this month. The index of consumer sentiment by YouGov jumped to 109.8 from 106.6 in July, which was a three year low. The impressive print follows strong retail sales and unemployment benefit claims last week.
However, today’s Fed Chair comments could cause more traders to start pricing in a wider monetary policy divergence between the Fed and the Bank of England, weighing on the GBP going forward.