Week Ahead Dollar Stumbles on Soft Inflation and Retail Sales Drop

US CPI and retail sales miss raise concerns on further Fed rate hikes

The US dollar is lower across the board after the release of the US retail sales and consumer price index (CPI) data on Friday. The CPI was unchanged from June and retail sales in the United States fell for the second month in a row. The Fed is confident that inflation is low due to temporary factors and anticipates that a strong labour market will lift inflation via wage increases. The disappointing data raises concerns about the U.S. Federal Reserve’s plan of action in the second half of the year. The central bank is expected to raise rates at least once and start trimming its balance sheet before the end of 2017 but persistent soft inflation could derail those well laid plans.

Next week will kick off with the release of China’s updated gross domestic product (GDP) calculation for the second quarter. The new methodology will include the contributions from health care, tourism and the so-called new economy. It is unclear how gradual the introduction of the new calculation will be with estimates calling for a 6.9 percent gain. China’s National Bureau of Statistics will release the GDP quarterly data on Sunday, July 16 at 10:00 pm EDT.

UK inflation has accelerated this year in the aftermath of the Brexit vote. The drop in the pound has hit British households as the pace of inflation has outgunned wage growth, leaving real wage growth in negative territory for 2017. The Office for National Statistics will publish the British consumer price index (CPI) on Tuesday, July 18 at 4:30 am EDT. Inflation was 2.9 percent last month and analysts are forecasting a repeat of that print, but there is risk it comes at 3 percent.

Central banks appear to have coordinated their change in rhetoric to a more hawkish tone following the lead of the U.S. Federal Reserve in 2017. The Bank of Japan (BOJ) and the European Central Bank (ECB) are not expected to make big announcements this week, but rather make some remarks to prepare the market for eventual changes later in the year. The BOJ is likely to mention the improvement of economic fundamentals but with weak inflation the central bank is not anticipated to make any change to its stimulus program. The BOJ will release its monetary policy statement on Wednesday, July 19 near midnight EDT and hold a press conference on Thursday, July 20 at 2:30 am EDT. The ECB could tweak the language of its statement to signal a tapering of its bond buying program. Given the communication fails in the past from the ECB the central bank could cause a bigger reaction in the market. The ECB will publish the minimum bid rate on July 20 at 7:45 am EDT and President Mario Draghi will hold a press conference at 8:30 am EDT.

The EUR/USD gained 0.562 percent in the last five days. The single currency is trading at 1.1449 as a dovish Fed and disappointing economic indicators put downward pressure on the USD. Fed Chair Janet Yellen had two back to back days of testimonies before US Congress and the Senate. Although she did not stray far from earlier rhetoric this time the read was more dovish with less confidence on the growth trajectory of the US economy. The Fed Chair’s comments and the drop in CPI and retail sales puts in question how much room the central bank really has to push through another rate hike. The lack of momentum of the US economy despite a solid job market could leave a balance sheet reduction as the only tool left in the Fed’s bag.

Political uncertainty in Washington on health care reform and the escalating Russian probe has not helped the USD. Gold and the JPY have risen as safe havens for investors concerned on the ability of the Trump Administration to pass pro-growth legislation when its encumbered by political hurdles. Softer economic data is not a disaster for the USD, but combined with rising political risk will make the market pare back growth expectations going forward.

The GBP/USD gained 1.527 percent in the last five days. Cable is trading at 1.3078 as inflationary pressure might force the Bank of England (BoE) to hike soon at the same time the Fed is facing lack of inflation in the US complicating the path of further rate hikes. The currency pair started the week just below the 1.29 price level and was at weekly lows as the BoE deputy governor issues new Brexit warnings that thought to be Fed dovish comments started the GBP bounce.

Soft data in the US and expectations of the UK over performing in the same indicators with a strong retail sales and inflation data could propel the pound higher. Longer term the fog of Brexit continues to hang over the future of the UK economy with ratings agencies and the central bank concerned about what type of deal Britain can agree with the European Union.

Market events to watch this week:

Sunday, July 16
10:00 pm CNY GDP q/y
10:00pm CNY Industrial Production y/y
Monday, July 17
6:45 pm NZD CPI q/q
9:30 pm AUD Monetary Policy Meeting Minutes
Tuesday, July 18
4:30 am GBP CPI y/y
Wednesday, July 19
8:30 am USD Building Permits
10:30 am USD Crude Oil Inventories
9:30 pm AUD Employment Change
Tentative JPY Monetary Policy Statement
Thursday, July 20
Tentative JPY BOJ Outlook Report
Tentative JPY BOJ Policy Rate
2:30 am JPY BOJ Press Conference
4:30 am GBP Retail Sales m/m
7:45 am EUR Minimum Bid Rate
8:30 am EUR ECB Press Conference
8:30 am USD Unemployment Claims
Friday, July 21
8:30 am CAD CPI m/m
8:30 am CAD Core Retail Sales m/m

*All times EDT