Week Ahead in FX: Retail Sales Next Hurdle for September Rate Hike

Strong US Retail Sales Needed to Validate the Fed’s September Rate Hike

The non farm payrolls report (NFP) gave the USD a boost in a week that was full of economic indicator releases. The positive employment report puts the pressure back on the Federal Reserve to hike rates in the September meeting. It was a mixed week for a U.S. dollar as the strength of the currency grew the trade balance deficit above expectations at $ 43.8 billion. The trade news was balanced with the positive survey of non manufacturing purchasing managers (PMI) whose index jumped to 60.3 erasing the losses from the negative trade data.

The Federal Reserve’s focus on data is forcing investors to raise their awareness of market events in the forex market. Expectations of September interest rate hike could be derailed by a weak showing from consumers as has been the norm for most of the year. On the other hand a strong retail sales figure could validate the September rate hike as it provides further evidence of the strength of the American economy.

Monday, August 10
9:30pm AUD NAB Business Confidence

Tuesday, August 11
5:00am EUR German ZEW Economic Sentiment
Wednesday, August 12
1:30am CNY Industrial Production y/y
4:30am GBP Average Earnings Index 3m/y

Thursday, August 13
8:30am USD Core Retail Sales m/m
8:30am USD Unemployment Claims

Friday, August 14
2:00am EUR German Prelim GDP q/q
8:30am CAD Manufacturing Sales m/m
8:30am USD PPI m/m
10:00am USD Prelim UoM Consumer Sentiment

German ZEW to Show if Greek Crisis Will Have Lingering Effects

Germany’s Center for European Economic Research (ZEW) will release its economic confidence data on Tuesday, August 11. Last month the reading showed a deterioration of German investor confidence in the midst of the Greek debt crisis agreement. Economic fundamentals haven’t improved significantly since then. China is still struggling with growth and the U.S. Fed has yet to commit to the first interest rate hike. The changes have come in the political arena. While a Grexit was never a threat to the German economy, it could have been the first falling domino leading into contagion. That scenario has been adverted for the most part as the German Finance Ministry is favouring a bride loan to help Greece negotiate a third bailout.

The ZEW economic sentiment was 29.7 in July and is forecasted to come back to levels last seen two months ago at 31.1. A reading above 0 is considered optimistic. To help put things in perspective the highest reading in the year was the survey results published in March at 54.8. The lowest level of ZEW was last month’s figure. Investors will be eyeing the ZEW release to gather insight into how well have German institutional investors and analysts view the economic health of Europe’s engine of growth.

U.S. Retail Sales Could Turn on Red Light on September Hike

Employment is the strongest component of the U.S. economic recovery, but so far all other indicators have been neutral to negative. The non farm payrolls data released on Friday, August 7 boosted the USD against all majors and gave green light to a September interest rate hike. Given the “data dependency” that the Federal Reserve has preached that does not mean that a negative core retail sales number could suddenly turn it into a red light.

The last monthly sales report showed a drop of 0.3 percent in retail sales. Excluding automobiles the reading was slightly better at -0.1 percent. The May sales figures had been a positive outlier at 1.2 and Core 1 percent gains beating the forecasts. Retail sales in the U.S. have been on a negative trend in 2015. Bad weather, U.S west coast port strike and other factors have been cited by economists as denting consumer confidence even further and making them opt for saving. Retailers are hoping consumers spend their energy savings. Given the seasonality of the retail sales figures and the low benchmark that previous data has received it would not be a total surprise if the July numbers beat expectations. A string of two major indicators back to back for the USD would pressure the Fed into finally initiating a tightening monetary policy cycle by putting in place the first interest rate hike. A lower than expected core retail sales could make the Fed push the timing back until December and if more negative indicators are released, leave it until the first quarter of 2016.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza