Retail Sales Plunge

Following a strong start to the week, driven in part by hotter-than-forecast inflation data, the US Dollar has reversed sharply into the end of the week. Yesterday’s US retail sales showed the first signs of weakness in the economy with both core and headline dropping sharply. Core retail sales came in at -0.6%, sharply down from the prior month’s 0.4% reading and well below the 0.2% the market was looking for. Headline retail sales were also lower at -0.8% from 0.4% prior, well below the -0.2% the market was looking for.

Easing Expectations

On the back of a string of better-than-forecast data recently, notably the latest set of labour reports, yesterday’s data caught USD bulls off-guard. While the data itself will likely do little to alter the Fed’s outlook, if we see any further data weakness in key readings, this might reawaken the prospect of near-term easing from the Fed, pulling USD lower near-term.

Bearish USD Risks

The Fed has reaffirmed its commitment to keeping rates in restrictive territory for now. However, this stance is taken within the context of inflation remaining sticky at higher levels and the economy generally remaining robust. If this context starts to shift we can expect a sharp repricing of rate projections causing widespread impact across markets as USD unwinds.

Technical Views

DXY

The rally has stalled for now into a test of the 104.95 level, with price now correcting lower within the bull channel. The channel lows offer near-term support with stronger support seen down at the 103.48 level. While this level holds the focus is on a fresh push higher near-term with 105.91 the next target for bulls.