Week Ahead: Watch Yellen, Inflation, and Retail Sales

Tomas Mccoy
July 12, 2017

On Monday, financial markets around the world rallied and the US dollar touched a high of two-months versus the yen as the most recent jobs data from the USA gave investors more confidence in the strength of the USA economy.

Nevertheless, we believe that since global key rates will rise very gradually from extremely depressed levels, their adverse effect on gold will be limited, especially since inflation in the USA and elsewhere remains low, even though the Fed believes that the strength of the employment market will ultimately feed through to inflation.

U.S. Treasury yields slipped on Monday, in line with weak European markets, as sharp gains following Friday's strong U.S. non-farm payrolls report prompted investors to consolidate positions.

The dollar index, which tracks the greenback against a basket of six major rivals, added 0.15% to 96.164 ahead of Yellen's semi-annual monetary policy testimony before Congress on Wednesday and Thursday.

MSCI's broadest index of Asia-Pacific shares outside Japan advanced 0.4 per cent, while Japan's Nikkei rose 0.8 per cent to a one-week high helped by weakness in the Japanese currency.

On Monday, the data released showed orders from Japan's core machinery tumbled unexpectedly in May.

"I think the increased hawkishness we have seen from the central banks has led to a fear that we could see a mini-taper tantrum", he said. The euro was 0.1 percent higher at 129.99 yen, after rising as high as 130.125 yen on Friday, its highest since February 2016.

A rate rise from Canada's central would be its first interest rate rise in almost seven years.

"The dollar is enjoying an increased yield appeal relative to the Japanese yen", said Omer Esiner, chief market analyst at Commonwealth FX in Washington.

The Federal Reserve stuck to its script in its semiannual monetary policy report, forecasting a gradual increase in interest rates and the imminent, if gentle, winddown of its balance sheet in the face of an economy that's still expanding eight years into a recovery.

The Group of 20 meeting in Hamburg over the weekend did not have much impact on markets on Monday. The latest USA economic reports, particularly for jobs, have been upbeat.

Based on the minutes of the last Federal Open Market Committee (FOMC) released on July 5, Yellen may testify that the Fed will seek to reduce the central bank's Treasury bond holdings and mortgage-backed securities by August, effectively tightening the supply of US dollars. A higher dollar, in which gold is priced, would also lower the value of the yellow metal.

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