NZ dollar heading to a weekly 0.8% decline, eyes on US

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United States consumer prices were unchanged in June and retail sales fell for a second straight month, pointing to tame inflation and soft domestic demand that diminished prospects of a third interest rate increase from the Federal Reserve this year. The Commerce Department said on Friday retail sales fell 0.2 percent last month.

Headline inflation is also showing in decline after a steep rally, as shown in the 5-year historical chart for headline inflation - which includes energy and food inflation - below. "Although the Fed had been expected to raise [interest] rates once more this year, a closely followed Wall Street forecasting site now puts the odds at close to zero".

The US consumer price index increased 1.6 per cent, the smallest gain since October 2016, after rising 1.9 per cent in May, the Labour Department said. The major US indices were all not far from all-time highs this week as quarterly earnings continue to come in.

Excluding the volatile food and energy categories, prices rose 0.1 percent in June and 1.7 percent from a year earlier.

The Aussie was 1.13 percent higher against the greenback at $0.7813.

The preliminary report said the consumer sentiment index dropped to 93.1 in July from the final June reading of 95.1. The company announced it had agreed to a settlement with disgruntled shareholders and the stock finished the week 16.2 per cent higher at 0.08 cents. As has become the norm of recent, a relatively hawkish Federal Reserve was unable to inspire any lasting strength in the currency while US data continued to disappoint.

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"(We) have felt that it probably remains prudent to continue on a gradual path of rate increases", said Fed chair Janet Yellen on Thursday in a Congress hearing in regard to the low inflation.

The lower-than-expected figures were the latest sign of muted inflation, which is a main threat to government bonds because it erodes the purchasing power of their fixed returns and can lead to higher interest rates from the Fed.

The greenback showed mixed performance in the Asian session. The number of older workers retiring has been inflated by the baby boom generation, and they are being replaced by younger, lower-paid employees.

EUR/USD is likely to find support at 1.1388 levels and now trading at 1.1465 levels. The dollar traded lower most of this year, after gaining sharply in the fourth quarter on expectations that President Donald Trump's election would lift the economy. The greenback is poised to find 110.00 as the next support level.

Data out today could, of course, surprise to the upside, but we don't think so - and it is more likely inflation will continue to show a retreat or at best no change - neither result is likely to be supportive of the Dollar. Year-on-year, production advanced 6.5%. The 2 yr yield was at 1.35% before the data and is down 2 bps since. The British pound gained significantly relative to the greenback, moving up by 1.11% to climb above the $1.30 level.

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