Fedspeak and US retail sales could test dollar’s resilience

Fed speakers to move the market again?

Amidst a holiday-shortened week, Fed speakers will be out in force, and it will be interesting to see if the hawks adopt an even more aggressive rhetoric. Minneapolis Fed President Kashkari has already commented that “it’s reasonable that a rate cut could come in December” with the more moderate Philadelphia Fed President Harker agreeing that "one cut would be appropriate this year".

At least six Fed speakers will be on the wires today including regional Fed presidents Barkin, Collins, Musalem, Logan, and Goolsbee, and Fed board member Kugler. With the exception of Barkin and Logan who are outright hawks and do not vote in 2024, the remaining speakers are probably going to express a more dovish take on the recent developments.

The market is currently pricing 45bps of easing in 2024 with a strong tendency for lower expected rates if the Fedspeak continues to be hawkish. However, as Chairman Powell highlighted at last week’s press conference, the data will determine if the Fed cuts rates this year.

US retail sales in the spotlight

The May retail sales report will be published at 12.30 GMT. Strong domestic demand is one of the key reasons for the continued economic outperformance of the US against the remaining developed countries. The market is expecting a positive set of figures today, which are unlikely to be welcomed by the doves.

In more detail, headline retail sales are forecast to record a monthly 0.2% jump. Similarly, the retail control group index, which focuses on retail and food stores, is seen rising by 0.4% and thus reversing April’s correction. However, when considering the latest prints from both the Consumer Confidence and the University of Michigan consumer sentiment indices, there is a good possibility of a downside surprise today.

European political risks to continue impacting the market

The US dollar is holding most of its recent gains against the euro as the heightened political risk has receded a tad. The French stock market managed to close in the green yesterday, but it is still around 5.5% down since the June 6 European elections outcome. Similarly, the 10-year yield spread between France and Germany tightened a bit yesterday but remains at its highest level since March 2020. With the first round of France’s parliamentary election just 12 days away, headlines from the euro area’s second largest economy will probably continue to affect overall sentiment.  

RBA meeting held no surprises

As widely expected, the RBA cash rate was left unchanged at 4.35%, with the statement being mostly similar to the May one and acknowledging that inflation is easing more slowly than previously expected. Interestingly, RBA Governor Bullock mentioned that there was a discussion on whether to hike rates, but the committee did not consider a rate cut today. As a result, the aussie/dollar pair is higher again today and a tad closer to its mid-May highs.

The market is clearly not believing that the RBA could hike rates as it is still pricing in 15bps of rate cuts by the end of the year, with the total easing amount rising to 53bps by the end of 2025. Until the August 6 gathering, a plethora of important data will be published with the decisive inflation report for the second quarter of 2024 expected on July 31.