Dollar Higher Ahead of Consumer Data

U.S. equity markets are on course to end the week on a negative note as investors await the latest consumer data, with retail sales for April and sentiment survey for May due to be released.

It’s been quite a mixed week so far in the markets with a lack of news flow providing little direction for investors. We appear to be seeing some moves on Friday ahead of the open, potentially driven by the U.S. dollar which has hit new highs for the week overnight. Weakness in the dollar since the start of February appears to have been one of the key factors behind the rebound in both the U.S. equity and commodity markets, so perhaps it’s not surprising that the dollar finding some support has stalled the rise in both.

We’re also probably seeing a negative lead from Europe when equity markets are also in the red, weighed down by disappointing GDP data from the eurozone. The main engine of growth in the eurozone, Germany, had a better than expected first quarter compared with the previous, growing by 0.7% but that failed to lift the region as a whole which managed only moderate growth, a familiar picture that is unlikely to change much over the next couple of years.

Focus will now turn to the U.S. consumer for more insight into whether the U.S. is really on a strong sustainable growth path. The consumer is a key pillar of growth for the U.S. and the absence of wage growth and spending has been a key factor that has held the economy back in recent years. Retail sales have again been reasonable this year but haven’t instilled confidence in the markets that the economy is on a strong footing, hence the constant belief that the Fed will hold off on raising rates until the end of the year.

Previously we may have been able to point to improving consumer sentiment and falling energy prices as a sign that spending will improve but the former has been on a downward trajectory since the start of last year and the latter appears to have had little positive impact. Should we see another disappointing retail sales report and UoM consumer sentiment reading, I think the market will give up all hope of a rate hike in June, if it hasn’t already. This is despite repeated suggestions by Fed officials that the meeting remains live and only yesterday, from Eric Rosengren a known dove, that the markets are too pessimistic about the economy and the path of interest rates.

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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam