Forex Monthly Review: U.S. Dollar

We’re more than halfway into the first month of the year so I thought I’d come up with a quick review on how the U.S. economy is doing so far and how its performance has affected the U.S. dollar’s forex price action.

Employment

Judging by the latest NFP figures, it seems that Uncle Sam has nothing to worry about in this economic aspect. The December figure surprised to the upside with a 252K gain in hiring, bringing the jobless rate down from 5.8% to 5.6%.

However, as I mentioned in my NFP review article, a few weak spots were seen. The participation rate marked another decline, indicating that Americans are exiting the labor force and giving up looking for work. Apart from that, wage growth remained a concern, with average hourly earnings showing a 0.2% decline for December.

Consumer Spending

While most forex watchers thought that the holiday shopping season and the drop in oil prices would spur higher than expected consumer spending figures, the actual retail sales report turned out to be a huge disappointment. The headline figure showed a 0.9% decline instead of the estimated 0.2% uptick while the core version of the report indicated a 1.0% drop versus the projected 0.1% gain.

Analysts predict that this sharp downturn in spending might lead to downgraded growth forecasts since consumer spending comprises roughly two-thirds of the country’s overall economic activity.

Inflation

With the slump in oil prices, it’s no surprise that the U.S. economy has reported lower inflationary pressures. For the month of December, headline CPI showed a 0.4% decline while core CPI stayed flat. The Fed already noted in their latest monetary policy meeting that below-target inflation is one of the reasons why they’re unlikely to hike interest rates early this year.

The producer price index (PPI), which is a leading indicator of consumer inflation, has already seen a 0.2% decline for November and followed up with a 0.3% drop for December. Because of that, the U.S. economy could be in for a few more months of falling price levels.

FOMC Monetary Policy Bias

Given these challenges to U.S. economic growth, no wonder the Fed is holding off any rate hike forecasts! As indicated in the minutes of their latest policy meeting, they’d rather be patient when it comes to making any adjustments, even though they are seeing positive developments in the domestic economy.

This explains the Greenback’s mixed performance at the start of the year, as it lost ground to the Japanese yen but managed to advance against the commodity currencies and the euro. Moving forward, further weakness in the U.S. economy is eyed, although this could still provide support for the dollar if risk aversion stays in place.