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The news that U.S. retail sales rose more than expected last month, dampened speculation that the Federal Reserve may ease monetary policy further in the near future. This helped strengthen the U.S. Dollar, putting pressure on the Euro, British Pound and commodity markets. Earlier in the session, the Euro was trading better, underpinned by the news that Germany’s economy grew slightly more than expected in the second quarter. This data may have actually neutralized a report that said the Euro Zone economy had an overall contraction.
In addition to the Commerce Department’s report showing sales at U.S. retailers increased 0.8% in July, the Labor Department reported that core producer prices, excluding food and energy, rose 0.4%. Analysts had been looking for a 0.2% increase.
This morning’s data helped boost the dollar because it is expected to reduce the pressure on the Fed to implement another round of quantitative easing. Some traders have been looking for the Fed to make a move in September; others believe the Fed will wait until December. Today’s reports may add a little more clarity as to when it will take action if at all. Interest rates rose on the news as well as equities.
The news this morning may be a sign that the economic recovery may be gaining momentum, but the real indication of this improvement will have to be in the jobs data since this is a key indicator the Fed monitors. Additionally, the Fed may still be forced to take action if the European economy continues to curtail U.S. economic gains.
The EUR/USD traded steady-to-better after the U.S. Dollar failed to hold earlier gains. Today’s technical action helped form a new higher bottom at 1.2241, giving the Euro a somewhat bullish tone. The current chart pattern suggests that sentiment is shifting to the upside. Investors turned optimistic almost three-weeks ago when European Central Bank President Mario Draghi pledged to support the Euro. After he failed to take action, the Euro sold off before posting a low last Friday.
The current rally suggests that investors are still counting on Draghi to fulfill his vow. Additionally interest rates have been holding steady in Spain and Italy. Bullish traders believe the ECB is waiting for Spain and Italy to tap the European rescue fund before it begins to purchase Spanish and Italian bonds. The developing rally in the EUR/USD suggests that the ECB may be poised to act swiftly and decisively over the near-term.
The GBP/USD is trading mixed. At first the Sterling rose on news that U.K. inflation rose unexpectedly. However, the rally sputtered as speculation resumed that the Bank of England was still poised to apply additional quantitative easing over the near-term. Strong upside momentum will be needed to drive this market through the pair of tops at 1.5767 and 1.5777. On the downside, minor support has been established at 1.5629.
Although U.S. inflation was higher than expected, December Gold is trading sharply lower. This was triggered by the strength in the dollar. Technically, the market is in a slight uptrend on the daily chart, but caught in a range between $1586.30 and 1633.30.
October crude oil is trading a little higher. At times it is being manipulated by the movement of the U.S. Dollar, but buyers seem to be supporting it on dips on speculation of a military skirmish between Israel and Iran. At this time $95.00 is solid resistance and $90.00 is psychological support.