The most important piece of economic data on the calendar this week is the U.S. retail sales report. While the level of consumer spending was far from impressive, consumption was firm enough to sustain speculation that the Federal Reserve will taper asset purchases this year. Retail sales growth slowed to 0.2% in the month of July from 0.6% in June but excluding volatile auto and gas purchases, spending grew 0.4% after stagnating the prior month. The dollar had been trading higher for most of the morning and extended its gains after the market learned that this was the fourth consecutive month of positive retail sales growth in the U.S. We had hoped to see retail sales grow by more than 0.7% but based on the reaction in the foreign exchange market, it is clear that investors feel that the data is good enough to keep the hawks talking about reducing purchases over the next 2 months, which is good for the dollar.

However at the same time, we do not feel that the data is strong enough to solidify expectations for tapering, which means investors are left guessing on how quickly the central bank will act. Until the release of the July FOMC minutes on August 21st and the Jackson Hole Federal Reserve Summit on August 22nd, we won’t get much additional clarity on where the central bank stands because the rest of the data this month is second tier. This suggests that while we have seen a nice rally in the U.S. dollar in reaction to retail sales, we continue to see the EUR/USD trading between 1.3100 and 1.3450 and the GBP/USD between 1.53 and 1.57 in the near term. USD/JPY on the other hand could be poised for additional gains because at the end of the day, the Fed is still gearing up to reduce asset purchases – the only question is when. There is significant resistance in USD/JPY near 98.75 but 10-year Treasury yields have responded very positively to today’s data and if they continue to rise, this level can be broken. Federal Reserve President Lockhart is scheduled to speak on the economy later today but as a nonvoting member of the FOMC this year, his comments will have a limited impact on the dollar.

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