Dudley throws a safe boat to Dollar after 5 months of CPI miss ?

Stock markets develop a bullish momentum received on Monday amid a suspension of threat exchange between North Korea and the US, but to say that the degree of tension has dropped to an insignificant level is too early to say. North Korean leader Kim Jong-un decided to take a break from the escalation of the conflict, postponing the launch of the missiles, but at any time ready to return to the trajectory of the fighting in the event of provocations, which can be joint military exercises of the United States and South Korea. It is noteworthy that the decision was followed by trade sanctions by China on the orders of the UN Security Council. The economic consequences for the state-autarky are estimated at 1 billion dollars. The leadership of South Korea assured that it would be impossible to unleash a war on the Korean peninsula without their permission.

The lull in the geopolitical arena returned investors' attention to defensive assets. The loss of gold was about 1 percent, the Japanese yen sank by 0.7 percent. Important in this case was the strengthening of the dollar's position, the growth of which was stimulated by the statement of the head of the Federal Reserve Bank William Dudley, saying that hinting third rate hike may be on cards if the US economy continues to develop in accordance with the forecasts. Amid this, the recent report showing the slowdown in consumer inflation for the fifth month in a row does not look so critical and it sharply restored optimism on the dollar. The chances for the December increase, according to the futures market, rose to 46.9%, shaping an upward corridor for the US currency. The retail sales report for July, coming out today, is likely to be used to further develop the bullish correction for the dollar. The backlog of forecasts in this report was probably already put into the market after the release of the CPI last Friday, so the chances of a negative scenario are minimal.

Data on German GDP surpassed expectations, showed a report released on Tuesday. Preliminary figures showed that the quarterly increase in output was 0.6%, taking into account seasonal fluctuations, which was yet another confirmation of the leadership of the German economy in the economic recovery of the European Union. The global turn in the policy of the ECB, which will be announced in September, is the main driver in the dynamics of the European currency. The growth of the dollar sent the pair EURUSD into decline, despite positive economic statistics.

Pound sterling fell sharply after the publication of the report on consumer inflation. Sterling rebound logically slowed the growth of consumer prices, lowering the chance of tightening by BoE. On the other hand, this has a positive effect on the purchasing power of households and gives an additional impetus to exporters, so the forecast for economic pickup in the UK should be improved. Today's report is likely to have a limited negative effect on the pound, however its dynamics will largely depend on the development of the bullish dollar rollback.

The Australian dollar squandered the accumulated potential after the release of the minutes of the RBA meeting, in which the regulator stressed that a strong currency is harming the economy. On the dovish side there was a weak report on vehicle sales, showing a decline by 2% compared to the previous month. The AUDUSD lost 0.2%, largely due to the strengthening of the dollar.

Arthur Idiatulin, Tickmill Market Watcher.