The US Dollar rallied against the world’s major currencies last week, as the Federal Reserve recognized improvement in the US labor market combined with escalated geopolitical turmoil in Europe and the Middle East. The greenback gained against a basket of currencies, as Russia and Ukraine pointed fingers to each other for the shooting down of the Malaysian Airline. Moreover, Fed Chairman, Janet Yellen, surprised the committee and the market with an unusual comment, as she cautioned that some sectors within the US equity market, in particular social media and biotechnology, have excessive valuations. That is the first time in 14-years that the Fed has commented specifically on valuation of a particular equity sector.
Yellen stated that, while “progress has been made in restoring the economy to health and in strengthening the financial system” she added that, “yet too many Americans remain unemployed, inflation remains below our longer-run objective, and not all of the necessary financial reform initiatives have been completed”. Janet Yellens’ comments suggests that the US economy still has a ways to go before reaching full capacity and therefore warrants the Federal Reserve to maintain interest rates low for a “considerable period” after the Fed winds down its asset purchase program, projected to conclude following the October meeting.
The Euro started the week at 1.3602, gaining only slightly, only to drop significantly after Federal Reserve Chairman Janet Yellen, testified in front of the Senate Banking Committee. The single currency continued to fall gradually during the week to touch a low of 1.3491, propelled by fears in the Europe over tensions in the Ukraine following the crash of a commercial plane. The single currency ended the week at 1.3524.
The Sterling Pound endured a volatile performance against the US Dollar. The Pound opened at 1.7117, fell to 1.7060, ahead of the inflation data. The Pound then erased its losses and more, reaching a 5-year high, as the country’s inflation accelerates more than economists’ forecasted to its fastest pace since January, fueling speculation that the Bank of England could raise interest rates sooner than previously expected. The GBP touched a high of 1.7192. Cable eased against the greenback, after Yellen’s testimony to touch a low of 1.7037 and ended the week at 1.7088.
The Japanese Yen range traded last week between 101.09 and 101.79. The JPY weakened since the beginning of the week to touch a high of 101.79, as the greenback gained momentum against a basket of major currencies. The currency reversed its trend on Wednesday, as investors become more risk averse seeking the safety of the Japanese Yen. The Yen gained against the USD to touch a high of 101.09. The Japanese Yen ended the week at 101.34.
Retail sales in the US jumped in March, indicating a gain in consumer spending that most likely helped the US economy rebound in the second quarter. Sales hiked less than the expected 0.6%, which is also lower than the previous month figure of 0.5% that came out more than previously expected. US consumers are more comfortable in spending more for wanted goods, as a strengthening labor market lifts earnings. The higher wages gave the American household the finances needed to endure the latest increases in food and gasoline prices that affected the buying power in recent months.
The Federal Reserve Bank of Philadelphia’s Manufacturing index surged in June, suggesting a continued growth following weather-related slowdown since the beginning of the year. The Philly Fed Index surged to 23.9 this month, after it rebounded in March from a drop below the 0.0 mark for the first time in 8-months in February. The figure exceeded most economists’ forecasts as the survey stood at only 16.0. It is the strongest reading since March 2011.
Number of Americans filing for unemployment benefits unexpectedly dropped last week, showing further improvement in the labor market. The number of people continuing to receive jobless benefits fell to a 7-year low, showing that the world’s largest economy is increasing the pace of growth. Jobless claims declined by 3,000 to 302,000, against a forecasted rise to 310,000. The slowdown in dismissals signals that the labor market is gaining momentum 5-years since the end of the last recession.
German economic expectations fell in July for a seventh month, as slower growth and geopolitical risks weighed on the outlook for Europe’s largest economy. The ZEW economic expectations index fell to the lowest level since December 2012, sliding more than the forecasted 28.2, to 27.1, from 29.8 the previous month. The gauge reached a 7-year high of 62.0 in December, and kept dropping since then. Industrial production fell for a third month in May and factory orders slid more than economists’ forecasted, in a sign that growth slowed in the three months through June. While the Bundesbank predicts a stronger expansion in the current quarter, political tensions in the Middle East and Ukraine pose downside risks to the global economy Germany relies on as an export.
The United Kingdoms’ unemployment rate unexpectedly dropped to a 5 ½ year low, and the number of people in work rose to a new record as the economic recovery strengthened. The jobless rate dropped to 6.5% in the three months through May, from 6.6%. Moreover, the jobless claims fell 36,300 in June from May, more than economists’ 27.1 forecast. The Bank of England Governor, Mark Carney put the labor market at the center of policy making earlier this year. In the three months to May, employment rose by 254,000 to 30.6 million, the highest level since records began in 1971. From a year earlier, employment rose 929,000, or 3.1%, the biggest annual increase ever.
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