Dollar Edges Higher as Momentum Turns Positiive

The USD/JPY recaptured the 124 handle, as dollar strength continues to broaden. Data has be mixed throughout the week, but traders continue to believe that the Federal Reserve has room for a rate lift off some time in 2015. The BOJ held interest rates steady, growth forecasts remained stable, and their QE remained intact. Momentum on the currency pair has turned higher as the MACD (moving average convergence divergence) index generated a buy signal.

September Fed rate hike was not precluded following mixed data this week and Yellen’s balanced testimony. But if Yellen is more inclined to delay liftoff, she can certainly justify it. At a minimum, the surprising softness in retail sales will give the doves some ammo and shake policymaker confidence over the sustainability of the recovery.

Additionally, the potential for further declines in commodity prices could limit the updraft in price pressures toward the 2% target. Before today’s reports, the hawks’ case for a September hike was supported by the pick-up in growth after the Q2 weakness, the improvement in Greece’s outlook and the rebound in Chinese shares. Yellen’s cautious optimism gave little away in terms of policy timing, as bets on a September hike have been pared since her speech last Friday. Fed policy outlook will be fluid from here on out, dependent on the whims of the data, capriciousness of the markets and volatility in global conditions.

June housing starts are out Friday and should show a 5.7% increase for the headline to a 1,095k following a big gyration in April-May that saw starts shoot up to 1,165k in April before dropping back to 1,036k in May. Accompanying the report we expect permits to slow to 1,105k from 1,250k in May and completions to slow 1,105k from 1,034.

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