Dollar strengthens ahead of US retail sales
The US dollar is continuing to show potential bottoming signs. Tuesday’s release of hotter-than-expected US inflation data, combined with weaker CPI data from the UK and a drop in Eurozone industrial production today, have all helped to boost the appeal of the US dollar in favour of the euro and pound. We have also seen the USD/JPY take out 133.00 resistance, while gold and silver have been trending lower on the back of rising bond yields.
But whether or not the recovery for the dollar will hold remains to be seen. The greenback has absorbed a lot of hawkish Fed speak and above-forecast US data. Yet it has bounced only modestly off its lows. Investors have repeatedly shown preference to racier equities, which has weighed on the appetite for haven US dollar. But is the tide turning? Will the dollar index start trending higher again? The immediate focus will be on US retail sales due for release shortly.
Support for the dollar this morning came from weakening foreign currencies.
EUR/USD undermined by EZ industrial production drop
This morning saw the EUR/USD fall back to 1.07 after its two-day recovery. Traders have boosted their expectations the Fed will hike rates by 25 basis points in March and probably one more time at the next meeting, before pausing, after US inflation eased less than expected to 6.4% y/y in January and this was followed by even more hawkish comments from the Fed, this time from Lorie Logan. Meanwhile, in the Eurozone, while the economy has narrowly avoided a recession, today’s release of industrial output, which showed a bigger-than-expected drop of 1.1% m/m, points to continued weakness. Nevertheless, the EUR/GBP has rebounded, and Eurozone indices are holding their own relatively well as economists have been impressed with the resilience of the Eurozone economy. Indeed, the European Commission now sees the eurozone avoiding a recession this year altogether.
UK CPI eases but remains in double-digits
In the UK, annual CPI remained above 10% for the 7th consecutive month in January, though at 10.1% it eased more than expected (10.3%) from 10.5% in the previous month. Core inflation eased even more to 5.8% from 6.3% previously, providing the Bank of England some breathing space after they raised borrowing costs for the 10th consecutive time earlier this month. However, the BoE still cannot relax, and BoE Governor Bailey has expressed concerns about the persistence of inflation: “I am very uncertain particularly about price-setting and wage-setting in this country. We have got the largest upside skew in our forecasts that we have ever had on inflation." The slight easing of CPI comes on the back of hot employment and wages data released the day before.
Together, the stronger UK wages and double-digit CPI data certainly suggest more needs to be done to bring inflation back to the 2% target. If CPI were to remain elevated around current levels of 10% or so, this would further encourage workers to bid up wages, and in turn companies may have to keep raising prices to cover their salary costs. So, it is possible that the tightness in the labour market will remain a key source of domestic inflationary pressure for a while. Thus, the BoE could be forced to hike rates by one or two more times before pausing.
Coming up
Later in the session, attention will turn back to the US where retail sales will be the highlight of the upcoming data releases, at 13:30 GMT. Sales are expected to rebound by 1.9% m/m after their 1.1% m/m decline in December. Strong retail sales could lift the USD further, as it would boost the sticky inflation narrative. We will also have the latest Empire State Manufacturing Index at the same time, followed at 14:15 by US industrial production and 15:00 by NAHB Housing Market Index. ECB President Lagarde is also due to speak, at 14:00 GMT.
Dollar index technical analysis
The technical picture on the dollar index has improved with the index breaking and holding above the 21-day exponential moving average. The bulls would now want to see a clean move north of 103.80, which was the high back in 2017. If this condition is fulfilled, then there are no other obvious resistance levels until 105.00. Even if we see a small dip, for as long as 102.60 support holds, the bulls will be happy now. However, a clean break below this level would put the bears back in control.
The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.
FOREX.com is a registered FCM and RFED with the CFTC and member of the National Futures Association (NFA # 0339826). Forex trading involves significant risk of loss and is not suitable for all investors. Full Disclosures and Risk Warning. Increased leverage increases risk.
GAIN Capital Group LLC (dba FOREX.com) 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA. GAIN Capital Group LLC is a wholly-owned subsidiary of StoneX Group Inc.
© FOREX.COM 2024