The U.S. dollar managed to end the week on a positive note despite a lower than expected retail sales reading on Friday and flat U.S. inflation data on Thursday. Economic data has begun to reflect the impact of Hurricane Harvey and later in the month, the effects of storm Irma will be taken into account. The pound was one of the few currencies that gained against the dollar after the Bank of England (BoE) left rates unchanged on Thursday, but said rate hike could home sooner than expected boosting the currency against the USD. Central banks will remain in the spotlight with the Fed and the Bank of Japan set to publish their September monetary policies in the week of September 18-22.
The U.S. Federal Reserve will publish its rate statement on Wednesday, September 20 at 2:00 pm EDT. The U.S. central bank will also release its updated economic projections and will host a press conference at 2:30 pm with Fed Chair Janet Yellen. Last month the Fed added that "relatively soon" it would start shrinking its massive balance sheet accumulated during its QE program. On the topic of a change to the benchmark, Fed funds rate the CME FedWatch tool rates the probability of a September rate hike at zero percent, with December a 50% chance.
The Bank of Japan (BOJ) will publish its monetary policy statement on Wednesday, September 20 at 11:50 pm EDT with a press conference to follow on Thursday, September 21 at 2:30 am EDT. The Japanese central is not expected to make a change to its monetary policy as inflation remains stubbornly low despite unprecedented stimulus by the BOJ. Growth has continued its upward trend but with little help from inflationary pressures, no reduction in stimulus is on the horizon.
The euro/U.S. dollar (EUR/USD) currency pair lost 0.812 % in the last five trading days. The single currency is trading at 1.1932 after US tax reform got closer to reality this week. The euro had advanced at the start of the week as more USD weakness was anticipated, but a turnaround in market expectations on a December rate hike and a show of momentum on tax reforms started a dollar rally putting the pair below 1.20. Political uncertainty has been a big factor of USD trading and a Trump administration ready to embrace dialogue with Democrats is seen as a productive development.
Next up will be the September Federal Open Market Committee (FOMC) meeting. The market is expecting the Fed to formally announce the start of the reduction of its balance sheet. Since the move is expected to be gradual the Fed could push the announcement back, especially if there is some uncertainty about a December rate hike but the dollar would suffer if that is the case. The White House has remained tight-lipped about who will be the Fed Chair next year. Yellen's term ends in February, and with the falling out to favor of Gary Cohn, she could even remain in the job. While Janet Yellen was not the first choice of the Obama administration she got the nod after a scandal took the front-runner Larry Summers out of contention.