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

US retail sales beat forecasts, weigh on Fed rate cut bets

The US dollar continued gaining against most of its counterparts on Wednesday, losing ground only versus the euro and the pound. That said, today it is pulling back, perhaps on profit-taking following its latest advance.

What pushed the greenback higher yesterday may have been the better-than-expected US retail sales for December, with both the headline and core rates coming in at double their November prints.

Accelerating spending may have added to investors’ concerns that inflation could remain sticky for longer than they have previously expected, and that’s why the probability for a March rate cut by the Fed was lowered even further to around 60%. The total number of basis points worth of reductions for the whole year was also reduced to 145 from 150.

After the retail sales data, the Fed revealed its latest Beige Book, where it was noted that the 12 Federal Reserve Districts registered “little or no change” in economic activity since the previous release, but it was added that most of the districts expected future growth for their firms to be positive.

This combined with Fed officials pushing back against market expectations of an imminent rate reduction means that there is scope for further adjustment in the market’s implied path and thereby room for further advances in the US dollar. Today, Atlanta Fed President Raphael Bostic will step onto the rostrum and traders may be eager to see whether he holds the same “high for longer” view as his colleagues.

Yen continues to dive on widening yield differentials

The yen was once again the main loser due to further widening in yield differentials between the US and Japan. With the BoJ appearing dovish at its December gathering and inflation in Japan cooling, market participants have abandoned bets of an imminent tightening step.

With that in mind, they may pay attention to the National CPI data, due out during the Asian session Friday. Given that the Tokyo CPI rates, which are closely correlated with the National rates, have further softened in December, the risks surrounding tonight’s data may be tilted to the downside.

Further slowdown in inflation may add to speculation that the BoJ will maintain its patience at next week’s gathering, and thereby allow dollar/yen to drift further north and get closer to the psychological zone of 150.00.

Pound gains after CPIs, euro recovers somewhat

The pound was one of the two currencies that recorded gains against the greenback yesterday, and this was due to the hotter-than-expected CPI inflation numbers, which corroborated the view that the BoE will likely follow a slower easing path than the Fed.

The other winner was the euro, perhaps as ECB President Lagarde’s comments that there may be majority support for a cut in the summer was interpreted as no rush to act in April, as she also noted that if investors are mispricing the ECB’s future moves, 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 conflicting signals they are getting lately, euro traders may dig into the minutes of the latest ECB decision to see if they can get more clarity on where most members stand. President Lagarde will be speaking again at the World Economic Forum in Davos.

Wall Street and gold suffer as implied Fed rate path rises

All three of Wall Street’s main indices extended their losses yesterday as the stronger-than-expected US retail sales data prompted participants to lift their implied Fed rate path. This suggests that equity investors continue to hold the mentality that “good news is bad news” and vice versa.

For the same reason, gold tumbled below the $2,015 support zone, completing a failure swing top formation on the daily chart. This technical setup increases the chances of further declines should data and headlines continue to pour cold water on expectations about a March cut by the Fed.