Will retail sales allow the dollar to extend its recovery?
The dollar traded on the back foot for the better half of this week due to dovish remarks by Fed officials who suggested that the surge in Treasury yields since they last met has done the work for them, implying that another hike before the end of the year may not be needed.
However, Thursday’s CPIs revealed that headline inflation held steady at 3.7% y/y, instead of slowing to 3.6% as expected, encouraging market participants to bring rate hike bets back to the table. From 28%, the probability for a final quarter-point rate increment increased to around 40%, while the rate reductions penciled in for next year have been reduced by around 10bps. This helped the dollar rebound.
As they try to further clear the fog, investors are likely to keep their gaze locked on more Fed speeches next week, with several officials scheduled to step onto the rostrum. It will be interesting to hear what they have to say in the aftermath of the inflation numbers.
That said, although their view on interest rates may be a priority for market participants, economic data may also be closely monitored for updated indications on how the world’s largest economic powerhouse has been faring.
On Tuesday, headline and core retail sales for September are forecast to have slowed to 0.2% m/m and 0.1% m/m respectively after both growing by 0.6% in August, while industrial production is also expected to have decelerated. On Thursday, although housing starts are seen increasing, the more forward-looking building permits are forecast to have slid, while on Friday, existing home sales are expected to have declined, suggesting that the housing market continues to cool down.
Nonetheless, with the Atlanta Fed GDPNow being upwardly revised to indicate that the US economy has expanded 5.1% in Q3, the dollar is unlikely to take another strong hit from slightly softer data, especially if Fed officials start talking about one more hike before the end credits of this tightening crusade roll. Even if the greenback pulls back again, such a retreat may be seen by the bulls as an opportunity to add to their positions at more attractive levels.
UK jobs, CPI, and retail sales data to shake the pound
The British pound will also enter the spotlight next week, with the agenda including the UK employment report for August on Tuesday, the CPI figures for September on Wednesday, and the retail sales for the same month on Friday.
At its latest gathering, the BoE kept rates steady citing slowing economic activity and a cooling labor market, and with the data since then keep painting a gloomy picture, investors are assigning a 78% probability for policymakers to remain sidelined at their next meeting in November, with the remaining 22% pointing to one last 25bps hike. They believe that a final hike is more likely to happen after the turn of the year, with a 55% probability assigned to the March 2024 decision.
The only data point corroborating more interest rate hikes by the BoE is wage growth, which remains elevated. Thus, for the hike probability to rise, just another print of strong weekly earnings may not be enough to change investors’ opinion. The CPI data may need to indicate that inflation is stickier than previously thought and retail sales may need to accelerate.
