CAPITALDIGEST MARKET REVIEW, 17/08/2026
August 17, 2026
DOLLAR FALLS ON SURPRISE DROP IN US RETAIL SALES
The dollar fell on Friday after data showed U.S. retail sales unexpectedly declined in July, helping send the euro and sterling to multi-month highs, as traders weighed Federal Reserve policy. Retail sales dropped 0.6% last month after an unrevised 0.2% gain in June. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, edging up 0.1%. “We are clearly having signs of poor consumption,” said Juan Perez, director of trading at Monex USA in Washington. “This evidence is clearly showing that there is an economic slowdown in the United States.” Softer-than-expected consumer and producer price inflation data this week has already tempered expectations that the Fed will raise rates at its September 15-16 meeting. Traders are now pricing in just a 31% probability of a September hike, alongside a 69% chance of a rate increase by December. Concerns over the labor market have deepened as well, after July’s payrolls report showed employers unexpectedly shed jobs last month. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.25% to 99.67. The euro rose 0.32% to $1.1564 and got to $1.1585, the highest since June 17. Sterling strengthened 0.33% to $1.353. It reached $1.3561, the highest since May 12. Traders are also focused on the U.S. conflict with Iran and efforts to open the Strait of Hormuz. Crude oil prices climbed on Friday over renewed attacks on tankers and a war of words between the Trump administration and Iran’s leadership. The Japanese yen strengthened 0.08% to 159.37 per dollar. It is on track for a weekly decline of around 1% as the effects of recent U.S. and Japanese intervention continued to fade. That has left traders betting that either a rate hike or another round of official buying will be needed to arrest the currency’s slide. Reuters reported the Bank of Japan is set to raise rates as soon as September and is considering more aggressive hikes to follow. Since exiting a massive, decade-long stimulus in 2024, the BOJ has raised interest rates at a pace of roughly twice a year, including in June, when it took rates to a 31-year high of 1%. “The recent interventions have failed to turn JPY sentiment around. On the contrary, JPY bearishness increased considerably over the past month, reaching four-year highs,” Bank of America analysts led by Ralf Preusser said in a report on Friday. Most fund managers surveyed by the bank for its most recent FX and rates sentiment survey believe that a 2% terminal rate could stabilize the currency, which would mean four more 25-basis-point hikes, they added. The yen was trading at 40-year lows near 164 per dollar before July’s intervention, and traders see the 160 level as a potential trigger for fresh official action. Its retreat mirrors a similar selloff in May, when it also fell back after a round of official buying.
POUND HOLDS GROUND AS SUNSHINE AND SOCCER BOOST CONFIDENCE IN UK ECONOMY
The pound held steady on Thursday and remained on track for a third weekly gain as burgeoning confidence in the UK economy was reinforced by data that showed growth unexpectedly picked up in June. Money markets show traders still expect one rate rise from the Bank of England this year, and Thursday’s economic data did little to shift that. The Office for National Statistics said UK gross domestic product rose by 0.3% during the month, putting Britain on course for the strongest growth among the Group of Seven rich economies in the first half of 2026, after being flat in May. Households and businesses enjoyed some respite from high energy prices caused by the Iran war in June, while the start of the men’s soccer World Cup and hot weather helped boost overall economic activity. Sterling was last unchanged on the day against the dollar at $1.349 and against the euro, which traded at £0.8547. Although growth was modest, it was mostly the product of consumer spending and business investment, rather than government spending, which could prove encouraging for investors, Jeremy Stretch, who is head of G10 FX strategy at CIBC Capital Markets, said. “Putting your head under the bonnet of the UK economy suggests that the momentum is perhaps a little more robust and a little more dynamic than we might have assumed,” he said. Next week brings a raft of inflation data that could be more influential in setting expectations for BoE monetary policy. “Despite the ONS estimated strength of growth in H1, we don’t think it will shift the BoE’s assessment. The BoE will still view the UK economy as operating with slack that supports domestic disinflation at present,” RBC Capital Markets said.
STERLING AT ONE-MONTH HIGH VS DOLLAR BEFORE ECONOMIC DATA
Sterling hovered around its one-month high against the dollar on Wednesday as investors braced for a raft of British and U.S. economic data later this week. The U.S. dollar ticked up, underpinned by renewed tensions in the Middle East, with markets awaiting fresh signals on the Federal Reserve’s policy trajectory. The pound was roughly unchanged at $1.3510, after hitting $1.3530 on Monday, its highest level since July 16. Analysts said Britain’s economy had not weakened enough to put the debate over further Bank of England rate hikes to rest, while gilt yields remained close to their highest levels in nearly two decades as fiscal uncertainty kept term premiums elevated. The term premium is the additional yield investors demand for holding long-term government debt, and it tends to rise when inflation, fiscal or policy risks increase. “Higher for longer oil prices may force the BoE to increase its tough talk against inflation, but so too would other central banks, suggesting that the forex reaction may still not favour the pound on all fronts,” said Jane Foley, senior strategist at Rabobank. “Uncertainty about the budget could keep the UK market nervous into the autumn and we would look to buy the euro/sterling on dips back to 0.85, with the 50-day simple moving average currently providing resistance around the 0.8578 area,” she added. The date for this year’s UK Budget has been set for Wednesday, October 28. Britain’s government will do what it can to help lower costs for business against the backdrop of a “difficult financial outlook”, Prime Minister Andy Burnham said in an interview on Wednesday. Deutsche Bank said euro/sterling three-month implied volatility was at 3.6%, a level it described as lower than at the same stage before any major British budget or fiscal announcement over the past two decades. The euro was 0.05% lower at 85.41 pence, after reaching 85.37 pence on Monday, its lowest level in almost three weeks.
DOLLAR STEADY AS TRADERS AWAIT KEY US INFLATION DATA
The U.S. dollar was steady on Tuesday ahead of Wednesday’s highly anticipated consumer inflation report for July, which could shape near-term expectations for Federal Reserve policy. Traders trimmed bets on a September Fed rate hike after Friday’s U.S. jobs report showed employers unexpectedly cut payrolls last month. A resurgence in inflation could revive those bets as the central bank continues to battle price pressures that are keeping inflation stubbornly above its 2% annual target. Conversely, further signs of disinflation could dampen tightening expectations. “So long as this disinflationary trend continues, it’s hard to make a case for rates to be going higher,” said Eric Theoret, currency strategist at Scotiabank. Rising oil prices, driven by an elusive deal to reopen the Strait of Hormuz, have reignited concerns over renewed inflationary pressure, though energy prices remain well below their recent highs. Oil prices edged up to a one-week high on Tuesday as the market focused more on supply disruptions in the Middle East and Russia than on signs of progress in talks between Oman and Iran over shipping through the Strait of Hormuz. The Strait of Hormuz will remain closed as long as the U.S. does not change its behavior and accept Iran’s conditions to end the war, the newly appointed secretary of Iran’s Supreme National Security Council said on Tuesday. Fed funds futures traders are pricing in a 50% chance of a September Fed rate increase, down from 58% a week ago. The dollar index , which measures the greenback against a basket of currencies including the yen and the euro, rose 0.06% to 99.83, with the euro down 0.02% at $1.154. The Japanese yen strengthened 0.01% to 159.28 per dollar. The U.S. and Japan coordinated last month to shore up the yen after it plunged to a 40-year low against the dollar. The yen has since relinquished some of its gains, raising the prospect of further intervention. Analysts said the yen will likely keep struggling until fundamentals improve and the Bank of Japan resumes raising rates. “It’s a show-me kind of situation when it comes to rates. Until and when they give us better fundamentals, the currency is just going to keep weakening,” said Theoret. Jane Foley, senior FX strategist at Rabobank, said that last month’s intervention came after the U.S. dollar had softened, making the operation less expensive. “If U.S. CPI inflation data prints a number for July on the softer side of market expectations, the value of the USD could stumble. It may be too soon to expect the MoF to intervene again, but a softer USD combined with fear of intervention would likely reduce the odds of another break above USD/JPY160,” she said. Elsewhere, the Reserve Bank of Australia kept its cash interest rate at 4.35%, as expected, but warned it may need to raise rates again. The RBA has increased rates by 75 basis points since February to combat inflation fueled by surging energy costs. The Australian dollar strengthened 0.06% to $0.7056.
STERLING LITTLE CHANGED NEAR OVER THREE-WEEK HIGH
The British pound was little changed against both the dollar and euro on Monday as markets awaited growth data later in the week and updates on talks in the Middle East to reopen the Strait of Hormuz. Sterling was last up less than 0.1% against the dollar at $1.3502, just below a three-and-a-half week high of $1.35085 hit on Friday. Against the euro, the pound was flat at 85.62 pence. Monthly growth figures, due for release on Thursday, are expected to show that the economy remained resilient in June, with the month’s retail sales unexpectedly strong due to spending linked to the World Cup and hot weather. Sterling traders were also keeping an eye on talks in the Middle East to reopen the Strait of Hormuz and any potential impact on energy prices. Oil prices rose slightly on Monday, due to continued uncertainty about the reopening of the strait. Iran said it was nearing a deal with Oman defining new shipping lanes but that the U.S. must meet other conditions. Expectations for Bank of England policy settings have tended to fluctuate with energy price movements, with higher oil prices and the feed-through to inflation expected to lead to tighter monetary policy. But so far, the BoE has decided to wait to see how the situation in the Middle East plays out, and refrained from tightening policy, unlike the European Central Bank, which raised borrowing costs in June. Investors are now pricing in one rate hike from the BoE by the end of the year, with a second hike fully priced in by September next year. ING FX strategist Francesco Pesole believes that markets are pricing in too hawkish a rate path for the BoE, which could weigh on sterling if it was reversed. “Our view on the pound is still bearish leaning on the back of our call for no rate hikes and markets still pricing in some tightening,” said Pesole.