DXY Hits Session Highs on Strong US Core Retail Sales Growth

Key Points

• The DXY briefly popped to session highs around 106.90 and neared monthly highs after the latest US Retail Sales data.
• Headline retail sales missed expectations on falling gasoline & car/parts sales, but core measures were stronger than forecast.
• USD/CAD held above 1.2900 in choppy trade before advancing slightly.

DXY Hits Session Highs Near 107.0 on Hot Core Retail Sales Figures

The US Dollar Index (DXY) briefly rallied to fresh session highs near 106.90 on Wednesday in wake of the latest mixed US Retail Sales figures for July, with traders focusing on stronger than expected core sales growth. Headline Retail Sales were unchanged MoM in July, missing forecasts for a 0.1% rise largely as a result of a MoM drop in both gasoline and car/parts sales.

But measures of underlying retail sales suggested the consumer remains strong, with Core Retail Sales posting a stronger than expected 0.4% MoM gain in July versus expectations for a 0.1% MoM dip, and Retail Control sales rising 0.8% MoM versus expectations for a 0.6% gain. At current levels in the 106.70 region, the DXY is trading with on-the-day gains of about 0.2% and is actually a tad lower versus its pre-Retail Sales data levels, but still remains close to its monthly highs.

Strength in core measures of retail spending will give the market participants and the Fed confidence that the US consumer, while still suffering at the hands of rampant inflation this year in their energy/food (and other items) costs, remains in good shape. According to the CME’s Fedwatch tool, US money markets were last implying a 56.5% chance that the Fed lifts interest rates by 75 bps at its 21 September meeting.

The chance of a 50 bps rate hike, according to the CME’s tool, was last at 43.5%. That contrasts with much more dovish pricing on Tuesday, when markets viewed the chances of a 50 bps rate hike at 59% and a 75 bps rate hike at 41%. A more hawkish than expected policy announcement from the Reserve Bank of New Zealand, who raised interest rates by 50 bps overnight to 3.0%, and data out of the UK showing headline consumer price inflation exceeding 10% last month and core price pressures building had also contributed to the hawkish shift in Fed rate hike expectations, even prior to the Retail Sales numbers coming out.

The next major FX market catalyst will be the release of the minutes of the Fed’s July policy meeting at 1800GMT, which will offer further insight into the central bank’s appetite for further tightening. Recent hawkish rhetoric from Fed policymakers, who have been keen to emphasize that more tightening is in store given that the inflation fight remains far from won, suggests the minutes might come across hawkishly.

USD/CAD Holds Above 1.2900 in Choppy Trade as Markets Digest Data

USD/CAD has been volatile in recent trade in wake of the hot US Core Retail Sales figures, with the pair holding at session highs just above 1.2900 and the bulls looking to push towards earlier weekly highs in the 1.2930s. At current levels around 1.2910, the pair is about 0.5% higher on the day.

No Canadian data was released on Wednesday, so US dollar flows are in the driving seat, but traders are still digesting data released on Tuesday which showed a pickup various measures of core inflation in Canada, supporting the case for another 50 bps rate hike from the BoC next month.

Aside from the upcoming Fed minutes release, USD/CAD traders will also be monitoring the ongoing decline in oil prices that has hurt the oil-export dependant Canadian dollar in recent weeks. On Friday, Canadian Retail Sales numbers for July will be released.