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Dollar falls after US CPI, retail data disappoint

16 July 2017

Sterling rallied to its highest rate in nearly ten months yesterday after figures for American consumer spending and retail sales came in below expectations, reducing further the chances of the US Federal Reserve raising interest rates again this year. Oil prices rose 1 per cent.

The consumer price index was unchanged in June, while core prices, stripping out food and energy, edged up just 0.1%, the Labor Department reported on Friday. The year-on-year CPI has been softening steadily since February, when it hit 2.7 per cent.

Economists had forecast the CPI edging up 0.1 percent last month and its drop of 0.1 percent in May and the lack of a rebound in June could trouble Fed officials who have largely viewed the recent moderation in price pressures as transitory.

"The CPI data begs the question, at what point does transitory becomes something that is more sustained, in terms of the softness", said Richard Franulovich, senior currency strategist at Westpac Banking Corp in NY.

The Federal Reserve is embarking on an annual summer ritual: Downgrading its overly optimistic forecasts for economic growth and, potentially, preparing for a pause in interest rate increases. The drop came after the USA data raised doubts about United States economic growth and whether the Fed will hike rates again this year.

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EARNINGS WATCH: Companies in the USA and in Asia will begin reporting their quarterly financial results and give their earnings forecasts for upcoming quarters next week. Instead, it stayed flat, and the inflation rate over the past 12 months moved further away from the Fed's 2% target, falling to 1.6% from 1.9% in May.

Despite two straight months of decreasing retail sales, consumer spending likely gained steam in the second quarter after a helping to restrict economic growth to a 1.4 per cent annualised rate in the first quarter.

As we discussed two weeks ago, USA data has disappointed for much of 2017, and that's created questions behind just how aggressively the Fed might be able to hike.

The euro EUR= gained 0.64 percent to $1.468.

Bank stocks have been helped by expectations that interest rates are going higher, and the fact that the Trump administration is pushing deregulation of the sector. The pan-European FTSEurofirst 300 index of leading shares rebounded to rise 0.10 per cent and close at 1520.41. The Dow rose 0.1 percent to 21,553.09.

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West Texas Intermediate (WTI) crude futures settled up 46 cents, or 1 percent, at $46.54 per barrel.

Wall Street expected a 0.1% gain in overall retail sales and a 0.2% rise ex-autos.

Extending early slide, the greenback dropped to an 11-day low of 1.3012 against the pound. "This keeps the Fed on a gradual pace" for further rate increases, said Eric Souza, senior portfolio manager at SVB Asset Management in San Francisco.

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Dollar falls after US CPI, retail data disappoint