US dollar bid for its safe haven status and on central bank divergence

Major stock indexes slid and defensive investments posted gains amid fears about an uneven economic recovery in the United States and the continuing spread of the Delta coronavirus variant.

Consequently, safe-haven demand has helped boost other risk-averse sectors while the US dollar gained on other currencies, bar the yen and CHF, for the second straight session despite a terrible miss in Retail Sales.

The Commerce Department reported Tuesday morning that US Retail Sales fell by much more than expected by economists.

While on the knee jerk the data might have concerned investors due to the supply chain disruptions and consumer concern over Delta's spread, on the second reflection, the reopening of the economy would be expected to continue to feed into the inflation feedback loop regardless of today's outcome.  

USD stays bid despite Retail Sales miss

Regardless of the 1.1% month-on-month drop, the bigger picture involves the re-opening of the economy and the implications of rising household incomes.

Spending across both goods and services would be expected to continue to grow. Moreover, the jobs market on which the Fed is most concentrated is more key at this stage. 

Hence the resilience in the US dollar and US yields managed to correct from the late Asian market lows on Tuesday despite the mixed US data.

Additionally, a much better than expected Industrial Production release went some way to offset the miss in Retail Sales. 

Total industrial output climbed 0.9% month-on-month in July versus market expectations of a 0.4% gain.

In other events today, the Federal Reserve's chairman, Jerome Powell was partaking in a Q&A but there was little in the meeting for traders to work with. 

Instead, Powell continued to express his concerns for the pandemic that is casting a shadow on economic activity. 

However, markets are paying close attention to the growing list of Fed officials calling for imminent tapering.  

Most recently, Fed's Eric Rosengren noted that “If we get another strong labour market report, I think I would be supportive of announcing in September that we are ready to start the taper program.  I think we are likely to meet by September meeting the criteria that we laid out. The obvious question mark remains whether problems with the delta variant start to slow down the labour market. So far we haven’t seen that.”  

Rosengren now joins Bullard, Waller, Kaplan, George, and Clarida in the more hawkish camp.  

Meanwhile, WATCH: Minneapolis Fed President Neel Kashkari (a Dove) who is speaking LIVE T 20.00 GMT at a Town Hall event:

Fed's Kaplan will be speaking on Friday.  

''Since the July 27-28 FOMC meeting, more and more Fed officials are tilting hawkish and so the minutes tomorrow will be of great interest ahead of the Jackson Hole Symposium next week,'' analysts at Brown Brothers Harriman pointed out, adding, ''we believe the ranks of the hawks will continue to grow, raising the odds of another hawkish shift in the September Dot Plots to show median lift-off expectations moving up to 2022.'' 

When the Fed is compared to such central banks as the Reserve Bank of Australia the European Central Bank, as well the emerging market central banks, the divergence is expected to keep the US dollar underpinned. 

Meanwhile, the prospects of a faster recovery in the US continues to play into the hands of the US dollar bulls.

The Atlanta Fed GDPNow rose to 6.2% from 6.0% prior today and this type of speculation combined with the prospects of central bank divergence, the US dollar could have some way to the upside to go yet.

USD smile theory in play

Indeed, the US dollar smile theory, which is something that has been written about in previous articles for some weeks, continues to play out. 

More on this from such prior articles as this: US dollar teases reversal traders, Golden Cross underpins 

In short, broadly stronger US data are feeding into increased dollar bullishness and the Fed continues to take tentative steps towards tapering. On the other hand, risk-off and uncertainty pertaining to the global pandemic are also expected to support the US dollar recently.

Therefore, the greenback is likely to benefit in either situation. Hence, the ''dollar smile'' as the dollar turns up at both ends of the risk spectrum:

DXY technical analysis 

As per the above image, we can see that there is a powerful confluence of the monthly double bottom, cup and handle, the 10 and 20 EMA bullish cross-over as well as the prospects of the 200 smoothed simple moving average being breached. 

All of this accumulates around the prospects of the price about to take on the critical swing highs in the 93.40s.