Last Chance for the Dollar to Rally

It has been a challenging week so far for the U.S. dollar. The greenback lost its value gradually against all of the major currencies.  Better than expected U.S. data failed to help the dollar on Thursday leaving tomorrow's retail sales and consumer price reports as the last chance for a rally in the greenback this week.  With producer prices rising more than expected and jobless claims falling, the odds are in favor of a dollar rally.  Higher gas prices and stronger price pressures on the producer level means that consumer price growth should have accelerated in the month of September.  Retail sales should also rebound as the higher cost of gas prices and the sharp increase in wages fuels spending.  These reports will be distorted by the hurricanes (gas prices increased) but wages are unaffected by the storms and the latest increase was strong enough to fuel a fundamental rise in spending. The only issue is that the forecasts are high with economists looking for retail sales to rise by 1.7%. To put this into perspective, that would be the strongest one-month increase in nearly 2.5 years.  Of course, a large part of the rise has to do with higher gas prices as spending less autos is expected to grow by only 0.4% compared to a decline of -0.1% the previous month. If retail sales are strong, USD/JPY will make a run for 113 but if it falls short with retail sales ex autos and gas missing expectations, USD/JPY will try to break 112.

The most exciting move today was GBP/USD which shot up nearly 100 pips in a matter of minutes after the London close on the back of reports that the European Union may be offering the U.K. a 2 year Brexit transition period which was exactly what Prime Minister May is asking for.  Not only does this headline suggest that the EU is ready to play game and are more willing to compromise but it also ensures a soft and not hard Brexit, which is the best case scenario for the U.K. economy.  While this is great news for the U.K., it is not clear how much near term impact it will have on the currency as Brexit is a long-term process. What we do know however is that GBP/USD's recent price action has not reflected rate hike expectations.  Now that the August high of 1.3269 has been broken, the next key resistance level for GBP/USD is the 20-day SMA near 1.3350.

Euro, unlike the British pound spent the majority of the day trading in a tight range.ECB President Draghi's highly anticipated speech did not have any impact on the currency.  Draghi touted the success of the central bank's negative rate policy, reiterated the central bank's guidance on QE and interest rates. The one line may have prevented the euro from rising was Draghi's reference to wages. He said that while the central bank sees some progress on wages, it is not enough.  The European Central Bank is still widely expected to reduce asset purchases at the end of the month but the chance of a dovish taper is growing. As we are looking for stronger U.S. data on Friday, on a technical and fundamental basis, EUR/USD appears prime for an end of week pullback to 1.1800, 1.1770 max.

After peaking at 1.26, USD/CAD rebounded today on the back of softer data, lower oil prices and a decline in Canadian yields. House prices grew at a slower pace in the month of August and actually turned negative in September according to the Teranet / National Bank.  Existing home sales and international securities transactions are scheduled for release tomorrow but CAD will take its cue from the market's appetite for U.S. dollars. The Australian and New Zealand dollars on the other hand traded sharply higher on the back of short covering and other factors. AUD/USD specifically was driven higher by stronger data, rising gold, iron ore and copper prices. Consumer inflation expectations increased while home loans and credit card purchases ticked higher.  The New Zealand dollar moved up in lockstep with AUD despite lower consumer confidence.  The main focus tonight will be on New Zealand's manufacturing PMI index and China's trade balance.  A strong rebound in Chinese trade activity is expected after subdued readings last month. Exports and imports are expected to rise, reflecting improvements in Australia's most important trading partner.