Dollar Woes and UK Retail Sales

The market is lacking conviction through the early part of the day, with market sentiment towards U.S monetary policy and Trump’s fiscal policies leaving the Dollar relatively flat following 2-days of decline.

While the FED Chair may have inadvertently weighed in on the Dollar on Wednesday night with a single negative comment on the U.S economy, macroeconomic data out of the U.S has continued to impress through the week, supporting the higher probability of a rate hike next month.

The general sentiment, despite an increased probability of a move by the FED, remains muted on the Dollar, the tug of war between the FED and the U.S administration taking its toll late in the U.S session on Thursday, Trump’s press conference leaving the markets perhaps confused and even bemused over the promise of tax reforms last week, the U.S president announcing that healthcare reforms are now to come ahead of any fiscal policy measures.

While the markets have to grapple with the about turn, the press conference itself had its usual tone adding to the negative sentiment, the markets having calmed over Trump’s methods through the last week, more amenable dialogue with trading partners having eased the tension.

So, with no material macroeconomic data scheduled for release today and with U.S markets closed on Monday, there’s little to shift the current sentiment towards the Dollar other than the declines over the previous 2-days that could spur some Dollar buying through the European and U.S sessions, though the markets will need to brush aside the temporary setback over tax reforms and refocus on economic indicators out of the U.S and the hawkish commentary that has been heard through the week from FOMC members and even the FED Chair, barring Wednesday’s comment during her testimony.

As things stand, the Dollar Spot Index has managed to make up lost ground, gaining 0.17% to 100.61 at the European open, though the lack of direction and stats through the day could see the Dollar cough up gains, should the markets fail to shake off the melancholy.

Across the pond, things are somewhat more interesting following Wednesday’s weaker than forecasted inflation figures, with January’s retail sales figures out for the markets to digest.

January’s retail sales were certainly a disappointment, with sales falling 0.3% for the month, well short of a forecasted 0.7% increase, December’s figures also revised downwards on what had already been considered weak numbers at the end of the year, December retail sales having fallen 2.1% month-on-month.

The BoE had pointed to a likely slowing in the UK economy going into the first quarter, which certainly raised the stakes this morning and weak retail sales figures will likely to drive speculation of the BoE needing to consider further monetary policy easing, the markets having only just begun to consider a rate hike, but that would have needed January’s inflation figures to have at least hit the 2% BoE target.

The markets responded in kind to the figures, cable falling 0.32% to a low of $1.24084 upon release of the figures.

Our view has been that rising inflation will likely be the bugbear of the UK economy through the 1^st quarter and it certainly seems that way, with January’s producer input price index pointing to a likely acceleration in inflation in the months ahead, but the immediate market response will be on this morning’s stats and possible implications from a monetary policy perspective, the economy likely to be under pressure through the 1^st quarter, particularly if the reliance on the services sector remains, as was the case through the 4^th.

Across the pond, the markets will continue to consider both the FED and the U.S administration, who are playing their part in the topsy turvy world of the Dollar.

At the time of the report, the Dollar Spot Index was up 0.24% at 100.68, the Dollar making ground against the EUR, while the pound continues to live in a world of its own, today’s moves driven by the sales figures, with the pound likely to remain under pressure through the remainder of the European session.