The US dollar softens before retail sales data

The US dollar softens before retail sales data
by Ipek Ozkardeskaya

The US dollar lost a bit of its shine as the Fed members did not deliver the hawkish comments that the USD-bulls were craving for. Selling pressures in the euro remain tight despite the temporary softness in USD and the lack of conviction in GBP-longs. The expectation for a Fed rate hike is priced in at 66% in the US sovereign market this Friday. The divergence between the Fed and ECB/BoE policy outlooks keep top sellers alert, rallies in the euro and pound are rapidly capped against the US dollar.

The euro surged to 1.0817 against the US dollar earlier in Asia yet failed to defend gains following the weak German GDP read. Given the ECB’s utmost determination in weakening the euro, the mid-term direction, traders thoroughly chase top selling opportunities to strengthen their euro short positions moving toward December. Combined to the potential rate hike by the Fed, the euro-dollar could reasonably fall toward parity. In the short-run, the political uncertainty in Portugal is also a decent downside risk. Portuguese bonds are the only ones sold-off n the Eurozone sovereign bond market this morning.

The pound stabilises at about 1.52 mark on the back of the broad USD weakness. Given the recent dovish divergence in the Bank of England’s policy outlook, it is just a matter of time before the pound slides to the 1.50 mid-term target.
Euro-pound still points to 70 cent level.

The US equities continue shredding gains. Off the November high of $2115, the S&P 500 slithered below $2050 and the downside correction could well deepen to $2000. 460 companies out of 500 have already released earnings and all sectors, except financials, beat market estimates by 4.67% so far. Nonetheless, the US oil and gas companies’ earnings fell 55.75% in the third quarter, sales dropped 35.20%. Health care, consumer services and telecommunication sectors outperformed. Overall, the S&P earnings grew 7.2% in 2015, suggesting that the US economy appears to be ready to absorb a potential rate hike from the Fed by December.

US October retail sales is due later today and is expected to remain soft. The consensus is 0.3% growth on month versus 0.1% in September. A soft read could push the USD-bulls on the side-lines yet will certainly not impact the Fed policy outlook. The US dollar is set to strengthen as we move closer to December FOMC meeting.