This morning’s U.S. retail sales report highlights how much of a challenge it has been for the Federal Reserve to stimulate the economy. Despite their no holds barred Quantitative Easing program, the sustainability of the recovery has come into question with this month’s abysmal retail sales and non-farm payrolls reports. While many Fed officials maintain a glass half full view of the recovery and believe that the jobs number will be revised higher, today’s data shows that despite record breaking levels in stocks, weak job growth and high unemployment has constrained consumer spending. This means the Federal Reserve will need to postpone their plans to taper asset purchases. At this point, we don’t expect the central bank to make any announcements on reducing the size of their monthly purchases until September at the earliest.

In the month of March, retail sales fell by 0.4%, the largest decline since June 2012. Excluding autos, spending also dropped by the same amount. According to the details of the report, Americans spent less on electronics, sporting goods, general merchandise and autos. With oil prices plunging at the end of February, gas station receipts also dropped 2.2%. Lower energy costs also drove producer prices down 0.6% last month. Yet the reaction in the dollar has been relatively benign with the greenback weakening only slightly against the Japanese Yen and instead of benefitting, the EUR/USD slipped back on the news.

Very strong retail sales numbers were needed for USD/JPY to break 100 and the fact that spending declined means that USD/JPY is likely to end the week on the 98 handle. Fed Chairman Ben Bernanke is scheduled to speak at lunchtime today but with no Q&A session and a topic focused on rebuilding low income communities, we would be surprised if there are any fresh comments on monetary policy. The University of Michigan Consumer Confidence report is up next and given the record-breaking levels in stocks and the stronger IBD/TIPP Economic Optimism index, a good number could help USD/JPY recover.

Meanwhile between the Eurogroup’s reluctance to provide Cyprus any additional aid beyond their initial EUR10 billion package and the weak U.S. retail sales number, the EUR/USD could remain under pressure throughout the North American trading session.

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