Article Highlights

  • U.S. retail sales beat forecasts
  • U.S. interest rate hike expectations broadly unchanged
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The euro held near the day’s lows on Wednesday after sources signaled European Central Bank chief Mario Draghi would not use his Jackson Hole appearance to signal policy change by the bank.

The euro has gained 11.5 percent so far this year against the dollar and is the best performing currency in the G10 FX space with most of its gains coming in recent months on growing bets that the European Central Bank will start unwinding its massive policy stimulus.

But the latest news dashed some expectations that the ECB will use the keenly watched annual Jackson Hole conference to chart a course out of stimulus.

“In the short term we are bearish on the euro/dollar as currency markets were expecting too much out of the ECB in the near term but in the medium term we are more constructive,” said Stephen Gallo, European head of FX strategy at BMO in London.

The euro fell 0.3 percent to $1.1701 and was trading near the day’s lows of 1.1691.

It hit a 2-1/2 year high of $1.1911 earlier this month and is down nearly 2 percent from that peak.

The single currency was trading down 0.2 percent at 1.13960 francs per euro.

On a flows basis, inflows into European-focused equity funds have slowed noticeably after a spike earlier this month though bond outflows have also slowed indicating the currency’s weakness may be shortlived.

The dollar held near a three-week high against a trade-weighted basket of its rivals as strong U.S. retail sales data boosted risk appetite.

“The North Korea missile fears seems to be abating for now and if the recent bunch of strong U.S. data translates into higher inflation, then markets will start pricing more interest rate increases from the Fed in the coming months,” said Ulrich Leuchtmann, an FX strategist at Commerzbank in Frankfurt.

The dollar index edged higher to 94.02 and was consolidating most of its overnight gains when it hit its highest level since July 26 at 94.14 in the previous session.

U.S. retail sales jumped 0.6 percent in July, handily beating economists’ estimate of a 0.4 percent reading.

But despite the strong data, interest rate expectations remain broadly unchanged with markets expecting the Federal Reserve to raise rates only once over the next 12 months, according to the CME’s Fedwatch tool.

Easing fears of armed conflict between the United States and North Korea also prompted investors to buy back riskier assets they had sold last week as fiery rhetoric between the two countries escalated.

Morgan Stanley strategists were wary about reading too much into the dollar’s overnight bounce, pointing out that economic data from other countries such as Sweden and Japan have been robust, indicating further dollar gains may be slow.