Markets Remain Wary of Yellen ‘Dovishness’ | Go Markets Daily FX Commentary

• Aussie dollar recovers once again after weaker Chinese manufacturing PMI;
• Softer UK retail sales and contained dissent between BoE officials weighs in Sterling;
• Stronger US data does little to shift greenback ahead of Jackson Hole speeches.

In early Asian trade, the release of HSBC’s preliminary Chinese manufacturing reading indicated a slowdown in activity this month (50.3 vs 51.5 forecast), whilst still recording an expansion. The data is well known to spark a reaction in the Aussie, the weaker data saw the local unit drop to lows of $0.9236 but, as has been the theme for some time, was quick to recover overnight as the greenback lost some ground. Appetite for the Australian currency appears to remain high throughout global markets as the yield remains attractive. Whilst events this week have seen the Aussie under some pressure, losses have been brief and the Aussie is clearly supported around current levels.

Weaker July retail sales from the UK contributed to Sterling losses against the Euro and Aussie yesterday, whilst managing to maintain ground against the Greenback and Yen. Retail sales in July recorded the slowest pace since November last year as consumer spending remained subdued, confirming the majority view from the Bank of England that weak wage growth warrants lower interest rates for longer. Whilst Sterling had an initial bounce following minutes from the Bank of England rate decision, which showed two of nine members to vote for a rate hike, there is now a sense that these contrary voters hold little persuasion over the dovish majority, Sterling suffering as a consequence. The Euro marched higher against the pound after encouraging manufacturing data from Germany, however with Mario Draghi preparing to speak at Jackson Hole this evening, anything could happen.

Reduced US jobless claims and encouraging home sales data was dollar supportive overnight, however data was overshadowed by the upcoming Jackson Hole conference where Janet Yellen will address the current state of the US economy. Markets have high expectations from the Chairwoman of the Federal Reserve following a relatively hawkish FOMC statement earlier in the week. Any return to dovish bias in this evening’s speech, perhaps focussing on continued weakness in consumer spending following last week’s poor retail sales data could put an end to recent dollar strength, and there is a sense that markets are trading with caution as we approach this evening’s US session.

[B]Tom Williams
Currency Analyst[/B]