Week Ahead in FX: USD Fate Hanging on Retail Sales

USD Lower after Fed Minutes as 2015 Rate Hike Hopes Evaporate

The USD has been weak across the board after the non farm payrolls report on Friday, October 2. U.S. employment had been a solid pillar of the American recovery, and now cracks are starting to show as NFP disappointed with a 142,000 jobs increment, when over 200,000 was expected. The minutes from the September Federal Reserve meeting were published and with it came confirmation that global factors are weighing in on the U.S. policy makers to keep rates on hold. The U.S. retail sales data released on Wednesday, October 14 at 8:30 am could put further downward pressure on the USD if they fail to beat an already negative forecast.

The Fed continues to tout a possible benchmark interest rate hike in 2015, but when it counts only one member Richmond Fed President Jeffery Lacker has voted in favour of a rate hike. There are two remaining FOMC meetings in 2015 and although the Fed has maintained that the U.S. economy is insulated against external factors keeping alive the possibility of a rate hike, the market has reduced the probability of that happening. Fed rate futures point to a lowly 8 percent chance of a rate hike in October and 34 percent in December.

Inflation data from around the world will be published next week. The United Kingdom and China will publish their Consumer Price Index (CPI) on Tuesday, October 13. U.K. CPI at 4:30 am and China CPI at 9:30 pm. The U.S. will release its inflation data on Thursday, October 15 at 8:30 am.

Monday, October 12
8:30 pm AUD NAB Business Confidence
Tuesday, October 13
Tentative CNY Trade Balance
4:30 am GBP CPI y/y
5:00 am EUR German ZEW Economic Sentiment
9:30 pm CNY CPI y/y
Wednesday, October 14
4:30 am GBP Average Earnings Index 3m/y
8:30 am USD Core Retail Sales m/m
8:30 pm AUD Employment Change
Thursday, October 15
8:30 am USD CPI m/m
8:30 am USD Unemployment Claims
10:00 am USD Philly Fed Manufacturing Index
5:45 pm NZD CPI q/q
Friday, October 16
8:30 am CAD Manufacturing Sales m/m
10:00 am USD Prelim UoM Consumer Sentiment

UK Inflation and Wages to Validate BOE Patience

The Bank of England unsurprisingly left its benchmark rate unchanged on Thursday. The Monetary Policy Committee (MPC) voted 1-0-8. The lone vote for a rate hike was Ian McCafferty who has voted for three months in a row in favour of higher interest rates. The rest of the committee seemed to share BoE member Martin Weale who in September said that lower commodity prices and the slowdown in China were influencing his vote.

U.K. inflation has been close to zero and well below its 2 percent target, and a cut to its growth outlook as consumer spending and manufacturing has cooled down have forced the central bank to change its tune from last year, were all economic signs pointed to a rate hike. U.K. year over year inflation will be released at 4:30 am EDT.

The consensus is for a rate hike to the U.K. benchmark rate in 2016. The global slowdown is starting to affect U.K. fundamentals and depreciate the GBP that was rising due to a rate divergence expectation that has now been pegged back. The rate is expected to continue at record low 0.50 percent until May 2016.

GBP events to watch this week:

Tuesday, October 13
4:30 am GBP CPI y/y
Wednesday, October 14
4:30 am GBP Average Earnings Index

*All times EDT

Retail Sales a Tough Hurdle for Dollar

U.S. retail sales data disappointed last month, but the fact that upward revisions were present for both retails sales and core sales (excluding autos) was the silver lining. This time around the estimate have been adjusted in anticipation of a contraction. The forecast for U.S. retail sales is 0.2 percent and core retail sales is expected at -0.1 percent. This is inline with auto dealers reporting stronger sales in September to offset lower prices and weaker spending. The USD has in the past rallied after a strong NFP to hit a wall of weak retail sales. There was no jobs boost for the USD this time around, so the hurdle of a weak sales indicator could deal a heavy blow to the greenback.

The USD was trading at 1.1160 before the NFP and will end the week below the 1.14 price line. The EUR/USD rangebound behaviour has more to do with the fact that even though the Fed disappointed with no rate hike, it is still supported by rate divergence as the European Central Bank could be forced to ease further to avoid deflation. A weak retail sales number could validate the Federal Reserve’s patience and push the rate hike to 2016, which in turn would put more pressure on the ECB to act to boost growth.

USD events to watch this week:

Wednesday, October 14
8:30 am USD Core Retail Sales m/m
Thursday, October 15
8:30 am USD CPI m/m
8:30 am USD Unemployment Claims
10:00 am USD Philly Fed Manufacturing Index
Friday, October 16
10:00 am USD Prelim UoM Consumer Sentiment

*All times EDT