Fed cautious on inflation

The dollar traded up to an intra-day high of around $1.1680 against the euro yesterday but reversed course after the release of the minutes of the Fed’s July meeting, shedding around a cent to just below $1.18

The Fed minutes noted that the recent decline in inflation in the US is likely to prove transitory and that it should move back up to its 2% target over the next two years. However, concern was expressed that it might remain below target for longer than expected, which in turn called for caution in raising interest rates. The minutes also  indicated that an announcement to begin reducing the Fed’s balance sheet will be made at the September meeting

Sterling gained ground against the euro after the release of UK labour market data, but reversed course in line with the move higher in EUR/$ to trade back over 91p. Employment in the UK rose by 0.4% q-o-q in Q2, sufficient to produce a further decline in the unemployment rate, which fell to 4.4% from 4.6% in the first quarter of the year. Annual earnings growth (excluding bonuses) picked up in Q2 but at 2.1% continues to run below the rate of inflation, so the squeeze on household incomes remains on-going

Retail sales data are due in the UK this morning while jobless claims and industrial production in the US