With the US Retail Sales report being the last, but maybe most important, report due to be released this week the Dollar continues to extends its gains. The US currency saw more upside versus the Euro and the Pound yesterday but lost ground against the safe haven Yen and Gold; looking ahead, investors will now focus on today’s figures for clues to dictate the direction going forward. Equities were able to notch a small advance yesterday and futures are pointing marginally higher this morning while Oil jumped to $53 following the incident in the Gulf of Oman.
The Dollar remained well bid this week as we expected despite the drop in Treasury yields - that are now back below the 2.10% mark - and the low inflation data seen a couple of days ago. The greenback is gaining as market participants are attempting to navigate a confusing environment which shifts from risk-on to risk-off depending on the mood of the US President. Safe havens usually do when in times like these hence the gains for the US currency against its higher beta peers like the Euro, the Pound and the commodity dollars.
However, we have to keep in mind that the Dollar itself could fall victim to a risk averse tilt in market sentiment in case of a sudden miss in domestic data. This becomes very relevant today given the upcoming release of the US retail sales report, which economists expect to print in a robust manner following last month’s lackluster reading. However, as we explained yesterday, the risk for the greenback in light of today’s figures is to the downside and we base this on two factors: one, the most recent employment figures indicated a slowdown in hiring and wage growth, which could lead to lower consumer demand and a miss in the retail sales data and two, with consensus calling for a 0.7% advance in sales today, even a still positive but lower 0.2-0.3% printing might be treated as another bearish signal.
Does this mean that we expect the Dollar to reverse its gains in case of a uninspiring Retail Sales report? Well, yes and no. We would expect the European and commodity currencies to see a near-term relief rally but their broader bearish direction should remain in place given that another piece of bearish US data will extend the risk-off bias and these instruments don’t fare well in conditions like these. However, the same can’t be said for the safe havens and we would expect to see a sustained push lower for the Dollar against Yen and Gold, in case today’s report misses, with the 107.80 and $1,360 areas coming into focus. Of course, and for clarity, in case the figures come in bullish as expected, then the greenback should simply extend its current rallies with the Euro pointing towards 1.12, Sterling towards 1.26 and Dollar/Yen moving towards the 108.80 mark.
Meanwhile, Gold is gaining on the back of the escalating situation in the Gulf of Oman. Two tankers have apparently been attacked by unidentified parties and the western allies ie. the US and Britain are pointing the finger at Iran, raising the stakes in the confrontation that started when President Trump decided to retreat from the Iranian nuclear agreement. Regardless of who’s the culprit behind the attacks, Gold is already trading above the $1,350 level but the way forward will be dictated by the US retail sales data. As mentioned already, in case of disappointing data the upside points $10 higher while a robust reading should keep Gold between $1,340 and $1,350.
Finally, equity futures are lacking a clear direction this morning after a day of small gains for European and US stocks. However, given the importance of the US consumer spending report due to be released later today, we should expect more volatility during the final trading day of the week. What seems interesting though is that equities probably only stand to gain from today’s figures: in case of a miss in consumer spending, a slowing economy is the takeaway, forcing the Fed to ease, which is a boon for equities; in case of a robust reading, the economy is still humming along is the conclusion, hence no reason to get out of any longs on equities until the Fed eases so again, more gains for the stock markets. Seems weird but let’s see how it plays out.
MARKET EVENTS TO WATCH
- US Retail Sales - 4.30pm
- BoE Governor Mark Carney speaks in London - 5pm
- University of Michigan Sentiment - 6pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research