Dollar Drops Ahead of Inflation and Retail Sales

Hawkish ECB minutes and China’s US bond purchases driving greenback lower

The US dollar is weaker across the board a day before the release of the US consumer price index (CPI) and retail sales data for December. The Bureau of Labor Statistics will publish the monthly report on Friday, January 12 at 8:30 am EST. Economists expect inflation to remain subdued with CPI coming in at 0.1 percent and core CPI at 0.2 percent. Retail sales are also forecasted to slow down with sales at 0.5 percent and the core reading at 0.4 percent. A surprise to the upside would boost the USD, but a confirmation of lower inflation combined with a hawkish European Central Bank (ECB) as per the minutes released earlier could further put pressure on the currency.

  • ECB December meeting minutes signal earlier end to QE
  • CAD rebounds from end of NAFTA rumours
  • US inflation and retail sales to guide dollar on Friday

The EUR/USD gained 0.72 percent on Thursday. The single currency is trading at 1.2033 after the European Central Bank (ECB) released the notes from its December monetary policy meeting. The central bank is preparing the market for the end of its massive quantitative easing program as it talks up the strength of the Eurozone economy. The language change reflects a focus going forward on continued expansion. Inflation has not risen near the desired target, which is why the ECB is not considering raising rates until 2019, but reducing the 30 billion euros a month in bond purchasing would be a step in the rate normalization goal.

The USD was under pressure yesterday when the financial press reported that China was considering diversifying away from its US treasury holdings. China denounced the rumours, but as global trade comes to the forefront and the Trump Administration has decided to play an America First strategy there has been a shift in what is considered a safe haven. The euro has advanced 0.24 percent this year and remained above the 1.20 price level.

usdcad Canadian dollar graph, January 11, 2018

The USD/CAD lost 0.16 percent since market open on Thursday. The currency pair is trading at 1.2528 with the CAD recovering from yesterday’s reports that the US was ready to withdraw from NAFTA. Canadian officials have increased the odds that the Trump Administration would pull out of the renegotiation table and invoke a six month period before terminating their participation in the two decade agreement. The White House has denied the rumours but gave no assurances about the fate of NAFTA saying the President’s mind changed.

Mexican and Canadian officials are now seeking new ways to approach the demands of the United States in particular regarding the auto sector. The US wants to increase the content of vehicles to 85 percent American from the current 62 percent.

The loonie remains higher against the greenback year to date at 0.42 percent with the upcoming monetary policy decision by the Bank of Canada (BoC) on January 17 expectation of a lift to the interest rate after a strong jobs report in December. The fate of NAFTA has been singled out as a concern by Governor Poloz, but it remains to be seen what was the desired impact of the two anonymous Canadian officials who spoke on the record to the press. If the intent was to sound out the White House and get a reaction, it was muted as very little seems to have changed. But if the plan was to measure market reaction to a possible end of NAFTA then the BoC could end up delaying its rate hike until NAFTA negotiation talks reach a conclusion however diluted it might be.

Market events to watch this week:

Friday, January 12
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m

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

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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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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