Fed December Rate Hike to Face Retail Sales Test

Fundamental US data to decide the fate of the USD

The USD is lower across the board against major currencies as risk aversion took hold of investors triggered by disappointing Chinese trade data. Exports contracted 10 percent year over year and imports shrank 2 percent despite lower commodity prices. The release of the minutes from the Federal Open Market Committee (FOMC) September meeting, developments in the Organization of the Petroleum Exporting Countries (OPEC) production cut deal and the complex fallout from Brexit are keeping markets on edge.

The U.S. Census Bureau will release the monthly change in retail sales on Friday, October 14 at 8:30 am EDT. The forecast calls for a small gain (0.4 percent) after last month miss at –0.1 percent. With inflation data a top priority for the Fed the publication of the Producer Price Index (PPI) by the U.S. Bureau of Labor Statistics to be released at the same time as the retail sales will have repercussions for the USD. Stronger sales and producer inflation will keep December rate hike expectations alive and boost the currency. Weaker economic data will keep the USD range bound until there is evidence the health of the U.S. economy justifies an interest rate hike at the end of the year.

Fed Chair Janet Yellen will speak at 1:30 pm EDT on macroeconomic research after the crisis. Investors will be following chair Yellen’ words for any insights on monetary policy decisions. The Fed has been optimistic about the growth of the U.S. economy but has had to alter its plans after multiple headwinds have hit the global economy. A rate hike in December appears to be more about preserving credibility for the central bank than a meaningful intervention to boost the economy. Economic releases on Friday and Tuesday will weigh on policymakers ahead of the November and December Fed meetings.

The EUR/USD gained 0.39 percent in the last 24 hours. The single currency is trading at 1.1054 after the release of weak trade data out of China took the wind out of the USD sails. The dollar rally had lost momentum with the release of the Federal Open Market Committee (FOMC) meeting minutes yesterday as the central bank was clearly divided on the path of American interest rates.

The USD is lower against majors ahead of the release of retail sales and consumer confidence data. The CME FedWatch tool reported a drop in the probability of a rate hike in December based on the Fed funds rate futures price. Yesterday the market was anticipating close to 70 percent probability of an upward change in the rate, but today it has gone down to 65.8 percent. Weaker retail activity, producer inflation and consumer survey data could further lower the expectations of the market as even as pro-rate hike voices rise within the Fed they are still in the minority. The Fed’ policy plans have been reactive to macro economic developments that have forced the American central bank to scrap the originally forecasted four rates hikes.

Market events to watch this week:

Friday, October 14
8:30am USD Core Retail Sales m/m
8:30am USD PPI m/m
8:30am USD Retail Sales m/m
10:00am 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