USD Awaits US Retail Sales as Fedspeak Pushes Rate Decision to End of Year

U.S. retail sales data disappointed last month, but the fact that upward revisions were present for both retails sales and core sales (excluding autos) was the silver lining. This time around the estimate have been adjusted in anticipation of a contraction. The forecast for U.S. retail sales is 0.2 percent and core retail sales is expected at -0.1 percent. This is inline with auto dealers reporting stronger sales in September to offset lower prices and weaker spending. The USD has in the past rallied after a strong NFP to hit a wall of weak retail sales. There was no jobs boost for the USD this time around, so the hurdle of a weak sales indicator could deal a heavy blow to the greenback.

The USD was trading at 1.1160 before the NFP and continues to trade below the 1.14 price line. The EUR/USD rangebound behaviour has more to do with the fact that even though the Fed disappointed with no rate hike, it is still supported by rate divergence as the European Central Bank could be forced to ease further to avoid deflation. A weak retail sales number could validate the Federal Reserve’s patience and push the rate hike to 2016, which in turn would put more pressure on the ECB to act to boost growth. German confidence has taken a hit from the V.W. scandal and weak China trade numbers continue to put the spotlight on the ECB as the Fed member comments keep hinting to the October monetary policy meeting will not bring a change in rates.

ZEW Confidence Hit by Scandals and China

Earlier today Chief Market Analyst Dean Popplewell wrote:

German confidence plummets: Economic confidence in Germany took a hit this month with the ZEW index down to 1.9 vs. 12.1 last month. Most disappointing is the current conditions index also falling to 55.2 from 67.5. The VW emissions scandal and weaker growth in EM are considered to be the main culprits.

Nevertheless there is a strong argument that with the domestic economy and eurozone showing signs of economic recovery Europe’s strongest economy will avoid sliding into a recession.

The Euro continues to flirt with the €1.1400 handle, supported by its elevated safe-haven status and on ECB commentary that more QE is “not” warranted at this time as policy makers believe that regional inflation should pick up by year-end. The same cannot be said for the U.K economy.

U.K. Inflation Validates BoE Patience

Under a year ago the Bank of England (BoE) were expected to be the first of the major CB’s to tighten monetary policy. After todays U.K inflation numbers that seems a distant possibility. Annual inflation has again turned negative for the second time this year, and supports FI dealers that U.K rates will be pegged at lower for longer for the foreseeable future. The BoE’s first-rate hike is being priced in for the end of H1, 2016.

Sterling (£1.5205) has dropped just under two big figures after data this morning showed that U.K inflation fell -0.1% m/m in September. However, the BoE’s rhetoric remains the same. Despite inflation remaining close to zero throughout this year, Governor Carney and company believes inflation will rise again towards their mandated +2% target in the medium term. Similar to other CB’s, the MPC is wary of hiking until it knows that the Fed is too. It seems that the markets will need to adjust their definition of ST, MT and LT!

China Surplus Grows but Lower Imports Worry Markets

The Chinese trade balance at $60.2 billion crushed the forecast of 48.6 billion and momentarily eased concerns about the world’s number two economy. The fact that most of that surplus was driven by a 20.4 percent year over year drop in imports does not bode well internally as demand is falling. Exports are 3.7% lower from a year ago which show some hope from local companies. The widening of the Chinese surplus raised red flags on commodity exporting who target the Asian powerhouse, nations such as Australia and New Zealand saw their currencies depreciate versus the USD. Asian stock markets reacted to the drop in imports and recorded losses.

The U.S. dollar has been under pressure since the September 17 Federal Open Market Committee (FOMC) when Fed members announced the U.S. benchmark rate would remain unchanged. The market has been anticipating a rate hike ever since the Federal Reserve announced it was tapering its massive bond buying program in the summer of 2013. The USD gains on the interest rate divergence trade have been slowly eroding as the Fed keeps a noncommittal tone in its official communications, even as Fed members are sometimes hawkish in individual statements. Yet, there has only been one vote recorded against keeping rates on hold. A single dissenter does not a rate hike make.

Market Analysts and Former Fed Members Criticize FOMC

The Federal Reserve has talked itself into a monetary policy corner. The U.S. economic indicators keep painting a positive growth story, specially if taking the global slowdown into context. Yet the decision by the Fed to not commit either way to a rate hike or to wait until next year has added extra levels of volatility to the markets.

Global institutions like the International Monetary Fund and the World bank had pleaded with the Fed to keep holding rates, as it could deal a heavy blow to emerging markets and set global growth back to crisis levels. Central banks have their hands tied until the Fed makes up its mind, as the actions from the American central bank have the power to undo even the most carefully laid plans. Private banks are the most vocal part of the market demanding the Fed announces the promised arrival of higher interest rates.

In that lies the problem as the “promise” from the Fed to raise rates it was easier said that done. Complicating matters more is the fact that the Fed tried to distance itself from the timing of the decision by relying on “data dependency”. This brought with it new uncertainty as every indicator could tip the scale, yet the weightings or how they are analyzed is not known outside of FOMC voting members.

David Folkerts-Landau, global head of research at Deutsche Bank said that the Federal Reserve was close to an historic mistake if it does raise rates soon. In a similar vein former Dallas Federal Reserve Bank President Richard Fisher said Tuesday the Fed should heed the call of central bankers around the world and get on with hiking interest rates. He even called the lack of decision an “egg on the face” of the FOMC.

Current St. Louis Fed President James Bullard is more optimistic although he is a good example of the contradictions of current Fedspeak. On the one hand he is all for a gradual rise of interest rates, and he still sees one this year. But on the other hand he doesn’t think there is enough data in October to make that happen. Pushing a possible interest rate hike to the December FOMC meeting. Bullard is not even a FOMC member, but he will be one next year. Atlanta Federal Reserve Bank President Dennis Lockhart shares the view of insufficient data. The lack of support for an October rate hike, has put the USD under pressure, but it remains mostly stable as it is the go to currency as a safe haven given the current global financial uncertainty.

USD events to watch this week:

Wednesday, October 14

8:30 am USD Core Retail Sales m/m

Thursday, October 15

8:30 am USD CPI m/m

8:30 am USD Unemployment Claims

10:00 am USD Philly Fed Manufacturing Index
Friday, October 16
10:00 am USD Prelim UoM Consumer Sentiment

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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