Dollar Eases After US Retail Sales Slumps to Worst in Nine Years

Summary: US December Retail Sales plunged to their worst fall in nine years, suggesting slower economic growth at the end of 2018. The benchmark US-Ten Year bond yield slumped 5 basis points to 2.66% (2.71%). The Dollar Index (USD/DXY), a measure of the Dollar’s value relative to a basket of foreign currencies slipped 0.22% to 96.986 from 97.12 yesterday. US Weekly Unemployment Claims rose to 239,000 against an expected 225,000 rise. Earlier a fall in Germany’s Q4 GDP to 0.00% against a forecast gain of 0.1% saw the Euro drop to a three-month low at 1.12492.  EUR/USD rallied to close at 1.1295 on an overall weaker US Dollar. Sterling slumped 0.47% to 1.2802 (1.2855) after UK lawmakers rejected PM May’s plan to seek changed for her Brexit deal. While optimism remained on US-China trade talks, a South China Morning Post article reported that both countries remained far apart on a key US demand. The crucial demand is meant to ensure that Beijing honours any commitment to intellectual property protection and equal market access.

• USD/DXY – The Dollar Index slipped 0.22% to 96.986 after trading to a two-month high of 97.28 yesterday. The strong resistance at 97.30 held and will likely reject any attempts to move higher. The weaker-than-expected fall in US retail sales, the worst in nine years, and a rise in Jobless Claims will prevent any significant Dollar gains for now.
• EUR/USD – Despite dismal Q4 German GDP growth, the Single currency rallied to 1.1295 from 1.1270 yesterday on the weaker US Dollar. Germany’s 10-year Bund yield slipped 2 basis points to 0.10% in contrast to the 5-basis point fall in its US 10-year counterpart.
• USD/JPY- The Dollar fell back 0.37% to 110.53 after advancing to 111.129, over 6-week highs. Weaker US economic data and reduced optimism on the US-China trade talks will cap the Dollar today.

On the Lookout: The financial turmoil and government shutdown at the end of 2018 has taken its toll on the US economy. The steep drop in overall retail sales follows other data pointing to slower growth. However, this is offset by a healthy job market and steady wage gains. This latest data may reinforce some of the market’s view that the Federal Reserve will hold off on raising interest rates this year. The Dollar’s strength may fade from here should US-China trade talks extend unnecessarily and the optimism is stretched.
Economic data today include China’s CPI and PPI for January, as well as a raft of US reports. The UK releases its January Retail Sales while the Euro-Zone reports on its Trade Balance. US data are: Empire State Manufacturing Index, US Capacity Utilisation Rate, and US Preliminary University of Michigan Consumer Sentiment.

Trading Perspective: Up until the release of US Retail Sales the Dollar had been looking good. The much weaker than expected data shows that there is less in the US economy than many had thought. Consumer spending accounts for about 70% of the economy. Expect the recent overall US Dollar strength to wane, culminating in a lower USD/DXY.

1. EUR/USD – The focus has been much on the slowdown in the Euro-area economies following recent weak data. However, the spotlight now falls on the US which should enable the Euro to recover off its lows. EUR/USD has immediate support today at 1.1260-70, which is an important pivot point. Immediate resistance can be found at 1.1310/20 and then 1.1350. Expect the 1.1270 level to hold and a likely grind to 1.1320 to follow. Prefer to buy dips on the Single currency.
2. USD/JPY – The Dollar has seen a strong rise to 111.129 overnight and over 6 week-high yesterday lifted by a risk-on stance on the optimistic US-China trade talks. The fall in US retail sales took the sting out of the Dollar and we may now see a pullback. USD/JPY has immediate support at 110.40, this morning’s low followed by 110.00. We can find initial resistance at 110.70 and 111.10. Look for a drift lower with a likely range of 110.10-110.70. Prefer to sell rallies.
3. AUD/USD – The Aussie saw modest gains to 0.7105, up 0.14% after trading to an overnight high of 0.71315. Immediate resistance today lies at 0.7125/30. Immediate support can be found at 0.7070 (overnight low of 0.70722). Australian 10-year bond yields were down to 2.14% from 2.15%. Given the 5-basis point fall in the US 10-year yield, expect the Aussie to grind higher against its US counterpart. Likely range today 0.7090-0.7140. Prefer to buy dips.

Great to be back, happy Friday and trading to all.