ECB Talks Down Euro but Dollar Dumped on Retail Sales

The retail sales report was the most important piece of U.S. data on this week's calendar and unfortunately it provided zero support for the greenback. Economists were looking for consumer spending to rebound after falling -0.3% at the start of the year but instead sales dropped for the second month in a row by -0.1%. Although sales ex autos and gas rose by 0.3%, spending overall is anemic given the strong pace of job growth. Part of the problem is wages but the recent volatility in the equity market also discouraged investors from big spending. The dollar and U.S. stocks tumbled as result but risk aversion overshadowed all else preventing pairs like EUR/USD and GBP/USD from rallying. Producer prices rose more than expected but PPI is far less important than retail sales. 

Tomorrow's Empire State and Philadelphia Fed manufacturing surveys could raise some eyebrows but the main focus will be political appointments as President Trump is widely expected to confirm Larry Kudlow as Gary Cohn's replacement. Kudlow is a well known financial media personality and his appointment would reassure the market, providing near term relief for USD/JPY and stocks. For the time being, 106 holds as support for USD/JPY, but a move above 107 would be needed to ease the negative flows.

The EUR/USD broke above 1.2400 during Asia trade but European Central Bank President Draghi brought it right back down at the start of the European session.Given his dovish comments at the last ECB meeting, his cautious comments were no surprise. He said policy must be patient and persistent because underlying inflation remains subdued and inflation needs to rise to end Quantitative Easing. He also added that the euro's strength could weigh on inflation, which implies that the stronger the euro rises, the less inclined they will be to taper asset purchases. ECB members Praet, Coeure and Villeroy all agree that inflation is low and the uniformity of everyone's comments makes it clear that the central bank is in no rush to change its forward guidance. With no UK economic reports released today, sterling ended the day unchanged against the greenback and higher versus the euro. No Brexit news is good news for the pound but the lack of progress is still worrisome.

Of the 3 commodity currencies, the Australian dollar was the best performer. Stronger consumer confidence, faster Chinese industrial production growth and positive comments from the Reserve Bank of Australia sent the currency sharply higher. According to RBA Assistant Governor Kent, the "good growth we're seeing, the low levels of spare capacity....raise the risk that inflation pressures will pick up." He also felt that "markets may be underpricing the risk of faster growth." As these are the most hawkish comments that we've heard from an RBA official, it was no surprise to see the big reaction in the Australian dollar. With that in mind, AUD/USD retreated from its highs during the NY session as the U.S. dollar bounced off its lows. A close above 79 cents is needed before there is a new leg of strength. USD/CAD ended the day near its lows after having run as high as 1.2976. There was no specific catalyst outside of the big 1.30 resistance level. The New Zealand dollar lagged behind ahead of tonight's GDP report. With retail sales and trade activity improving at the end of the year, stronger growth is anticipated. If GDP beats expectations, we could see NZD/USD rise to 74 cents but the strongest move should be versus the euro as EUR/NZD is at risk of dropping to 1.6750.