US Dollar (DXY): Response to Retail Sales Data Sparks Rate Hike Uncertainty

DXY Highlights

• Weaker-than-expected retail sales data impact U.S. dollar.
• Dollar index recovers after initial decline, reducing the impact.
• Traders uncertain about rate hikes despite pause in June.

DXY Overview

On Tuesday, the U.S. dollar weakened against a range of currencies due to lower-than-anticipated retail sales data for April. This supported the belief that the Federal Reserve will halt its rate hikes next month. However, the impact was not significant as the dollar index recovered almost entirely shortly after. While the report may have convinced traders that the Fed will pause in June, it did not persuade the market that the central bank will start reducing rates before the year ends.

At 13:21 GMT, June U.S. Dollar Index futures are trading 102.265, down 0.006 or -0.01%. On Monday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $28.03, down $0.07 or -0.25%.

April Retail Sales Fall Short, Barely Keeping Pace with Inflation

Retail sales in April fell short of expectations, increasing by only 0.4%, according to the Commerce Department. This figure matched the rise in the consumer price index (CPI), indicating that consumers barely kept up with inflation.

On an annual basis, sales were up just 1.6%, significantly lower than the 5% CPI pace. The drop in gasoline sales and declines in sporting goods, music and book stores, as well as furniture and home furnishings, contributed to the sluggish spending figures. However, miscellaneous store retailers, online sales, and health and personal care retailers saw some gains.

While the report showed the first positive reading since January, it still indicates challenges ahead for consumers. Treasury yields rose initially, driven by the positive ex-autos number, while stock market futures remained negative.

Dollar Investors Grapple with Concerns Amid Government Financial Shortfall

Dollar investors have several concerns to contend with, including a crucial meeting between U.S. President Joe Biden and Republican House of Representatives Speaker Kevin McCarthy, as the deadline for the U.S. government potentially facing a financial shortfall loomed just over two weeks away.

Analysts suggest that apprehensions regarding the debt ceiling have contributed to the recent strengthening of the dollar. The dollar tends to benefit from a “flight to safety” during uncertain times and is influenced by evolving expectations surrounding central bank policies.

Technical Analysis

The main trend is up. The trend turned up on Friday when buyers took out 102.185. It was reaffirmed on Monday when the buying extended past 102.480 to 102.585. A trade through 100.520 (S3) will change the main trend to down.

An extended rally through 102.405 (S1) will indicate the buying is getting stronger with the next major target coming in at 103.631 (R3).

Taking out 101.797 (S2) will be a sign of weakness.