For the past few weeks, the U.S. dollar has oftentimes moved in a completely opposite direction from Treasury yields. That trend continued on Thursday as the greenback shrugged off losses in 10-year rates to trade higher against all of the major currencies. Federal Reserve Chairman Powell may not be as eager to normalize monetary policy as other central banks but U.S. data could force his hand. According to the latest report, jobless claims fell to a new post-pandemic low of 360K. Manufacturing activity in the Philadelphia region slowed but the Empire state index hit a record high. June retail sales numbers are due for release tomorrow and the risk is to the upside. Economists are looking for spending to fall for the second month in a row due to slower auto sales but with strong non-farm payrolls and higher wages, retail sales could beat expectations which would drive USD/JPY higher and EUR/USD lower.

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The Bank of Japan meets tonight. BoJ rate decisions are not generally big market movers especially when no policy changes are expected from the central bank. Still, a cautiously grim outlook is anticipated along with lower economic projections. Japan is struggling with the pandemic. Not only is the country in its fourth state of emergency but outbreaks have been reported at the Tokyo Olympics.

While the commodity currencies sold off hard on Thursday, EUR/USD is the most vulnerable to extended losses. Amidst all of the hawkish language by policymakers, ECB officials said they don’t want to taper until the time is right because Europe is still struggling with the delta variant, mixed data and a slow recovery. Tomorrow’s Eurozone CPI and trade reports will take a backseat to U.S. retail sales.

The selloff in sterling masked a sharp intraday reversal. GBP/USD almost hit 1.39 on the back of hawkish comments from the Bank of England. This morning, BoE member Saunders said it may become appropriate to withdraw stimulus soon which echoes yesterday’s comment from Deputy Governor Ramsden who said he could envision tightening sooner as he wouldn’t be surprised if CPI hit 4%. This would be a significant increase from the 2.5% yoy rate just reported. Labor market numbers were mostly better with jobless claims falling more than expected, the unemployment rate improving and average earnings rising sharply. All of this plays into our view that the BoE is preparing to taper again this summer.

All three of the commodity currencies fell sharply on Thursday. Job growth in Australia slowed in the month of June, reflecting the consequences of lockdown. Virus cases are also on the rise, forcing new restrictions in Melbourne. Earlier this week, the lockdown in Sydney was extended by another two weeks. These restrictions will slow the recovery and put the Reserve Bank of Australia further behind in the line for tightening. The New Zealand dollar which enjoyed strong post RBNZ gains also fell sharply but a bounce is possible on CPI tonight. Chances are the central bank decided to the cease asset purchases because inflation is hot. Meanwhile, USD/CAD rose to its strongest level in 2 months. The Canadian dollar completely shrugged off the Bank of Canada’s reduction in asset purchases in favor of falling oil prices.