Why did strong retail sales fail to lift the USD?

By on February 16, 2022 0

The US Dollar traded lower against all major currencies on Wednesday despite hawkish FOMC minutes and strong US data. The Federal Reserve is on track to raise interest rates in March, especially after the 3.8% jump in retail sales last month. Economists expected the increase to be led by auto and gas sales, but excluding autos, spending rose 3.3%, easily eclipsing their forecast of 0.8%. Consumers seem indifferent to rising prices as they continue to spend. Although Omicron’s concerns cut restaurant and bar spending by 0.9%, Americans turned to their computers and spent 14.5% more online. Sales of furniture and motor vehicles were also strong. Industrial production rose 1.4%, three times more than expected. With inflation at a 40-year high and consumers shaking Omicron fears, not only is a March rate hike assured, but the risk of a 50 basis point hike is over 70% at this stage.

There were no surprises in the Fed minutes. Most participants said rates should rise at a faster pace than in 2015, but that’s a given because they raised rates in December 2015 and then waited a full year before tightening again. Given the persistence of high inflation, they will also consider ending net asset purchases next month. The dollar sold off because there was no mention of the need for a more aggressive rate hike, but with the latest inflation report released well after January’s FOMC meeting, we’re sure that concerns about price growth exceeding their long-term targets have intensified.

There are several reasons why the US dollar weakened today. First, there was no love for retail sales because investors fear demand growth has peaked with yields rising and stocks falling. With 10-year Treasury yields above 2%, there was no further increase after the retail sales report and the lack of an extension in US yields kept the dollar from rising. Tomorrow’s Philadelphia Fed index and housing market reports won’t help the dollar as after the Empire State survey turned negative for the first time in 20 months. Finally, investors may fear that rising inflation will also push other central banks to accelerate their tightening plans.

Speaking of inflation, consumer prices in Canada and the UK rose more than expected at the start of the year, pushing the Canadian dollar and British pound higher. Both countries are expected to see interest rate hikes alongside the United States next month. The euro also recorded gains thanks in part to stronger industrial production.

The Australian and New Zealand dollars were the best performing currencies, but tonight’s Australian labor market numbers pose a risk to the Australian dollar. According to PMI reports, there was very little change in hiring in the month of January. New Zealand producer prices are due out Friday morning local time, and with the CPI rising sharply at the end of the year, the PPI should also be hot.

Traders should also keep an eye out for headlines from the Iranian and Russian-Ukrainian crisis which can have a noticeable effect on risk appetite.