Home Forex Strong retail sales pour more cold water on Fed rate cut hopes

Strong retail sales pour more cold water on Fed rate cut hopes

by SuperiorInvest
  • Dollar rises as US retail sales beat estimates
  • Probability of Fed rate cut in March continues to fall
  • Yen falls further ahead of Japan’s national CPI data
  • The pound and the euro recover some of the lost ground

US retail sales beat forecasts, weighing on Fed bets on rate cut
The US dollar continued to gain ground against most of its peers on Wednesday, losing ground only against the euro and the pound. That said, it is pulling back today, perhaps due to profit-taking following its latest advance.

What drove the dollar higher yesterday may have been better-than-expected US retail sales for December, with headline and core rates doubling their November numbers.

The acceleration in spending may have increased investors’ concerns that inflation could remain stable for longer than they previously expected, and that’s why the likelihood of a March rate cut by the Federal Reserve dropped. even more to around 60%. The total number of basis points of reductions for the full year was also reduced from 150 to 145.

Following the retail sales data, the Fed revealed its latest Beige Book, noting that all 12 Federal Reserve Districts recorded “little or no change” in economic activity since the previous release, but adding that most districts expected future changes. that the growth of their companies is positive.

This, combined with Fed officials’ rejection of market expectations of an imminent rate cut, means there is room for further adjustments to the implied market path and therefore room for further US dollar advances. . Today, Atlanta Federal Reserve President Raphael Bostic will take the podium and traders may be eager to see if he maintains the same “higher for longer” vision as his colleagues.

Yen continues to fall as yield spreads widen
The yen was again the main loser due to a further widening of yield differentials between the United States and Japan. As the BoJ appeared dovish at its December meeting and inflation in Japan cooled, market participants have abandoned bets on an imminent tightening measure.

With that in mind, they may pay attention to the domestic CPI data, which will be released during the Asian session on Friday. Given that Tokyo CPI rates, which are closely correlated with national rates, have softened further in December, risks surrounding tonight’s data may tilt to the downside.

A further slowdown in inflation may increase speculation that the BoJ will remain patient at next week’s meeting and therefore allow the dollar/yen to move further north and approach the psychological zone of 150.00.

The pound rises after the CPI and the euro recovers somewhat
The pound was one of two currencies to post gains against the dollar yesterday, and this was due to higher-than-expected CPI inflation figures, which corroborated the view that the Bank of England is likely to follow a more easing path. slower than that of the Federal Reserve.

The other winner was the euro, perhaps because ECB President Lagarde’s comments that there could be majority support for a cut in the summer were interpreted as there being no rush to act in April, as she also signaled that if investors are mispricing the ECB’s future measures, that could be counterproductive to the fight against inflation. That view was echoed by Dutch central bank chief Knot later in the day.

Today, given the mixed signals they are receiving lately, euro traders can delve into the minutes of the ECB’s latest decision to see if they can gain more clarity on the position of the majority of members. President Lagarde will speak again at the World Economic Forum in Davos.

Wall Street, Gold Suffer as Fed’s Implied Rate Path Rises
Wall Street’s three major indexes extended their losses yesterday as better-than-expected U.S. retail sales data led participants to raise their implied path for Federal Reserve rates. This suggests that stock investors continue to maintain the “good news is bad news” mentality and vice versa.

For the same reason, gold fell below the $2,015 support zone, completing a failed swing top formation on the daily chart. This technical setup increases the chances of further declines if data and headlines continue to pour cold water on expectations for a March cut by the Federal Reserve.

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