Refreshed US dollar awaits Fed minutes and retail sales

The recovery of the US dollar has regained a second wind, despite some signs that the US economy is running out of steam. Investors seem far more concerned about Europe and China, which are helping the reserve currency attract safe-haven flows. Retail sales data and minutes from the last Fed meeting will hit markets on Wednesday, providing new clues about how much interest rates could be raised this cycle.

No alternative

With the Fed opening the door for a slower pace of tightening and the latest batch of CPI readings signaling that inflationary pressures have started to lose steam, it looked like the relentless rise in the dollar was finally running out of juice. . But this weakness did not last long.

As soon as the outlook for other major economies darkened, traders rushed to the safety of the reserve currency. China’s real estate sector is collapsing and the latest data reflects the ongoing crisis, steering investors away from currencies like the Australian or New Zealand dollar, whose economic models rely on China absorbing their commodity exports.

Meanwhile, Europe is still struggling with an energy shortage. Natural gas prices on the continent have risen to defy records as every country tries to stock up for winter, keeping pressure on consumers and ravaging the euro.

On the other hand, the American economy does not seem so fragile. While leading indicators such as business surveys point to slower growth ahead, the labor market remains at full employment, calming some nerves about a deep recession. Currency trading is a relative game after all, when other major economies are in trouble, the dollar naturally shines.

Fed Minutes

This week, the show kicks off on Wednesday with the latest retail sales. Expectations are mixed, the headline should have risen in July while the base figure is slightly lower than last month.

More importantly, the retail trade control group used in GDP calculations should have grown at a healthy pace, confirmed by credit card spending data from Mastercard and JPMorgan Chase. The catch is that these impressions are not adjusted for inflation. Once CPI inflation is taken into account, real retail sales are negative for the year.

A few hours later, the minutes of the Fed’s latest decision will be released. It was then that the FOMC raised rates by three-quarters of a percent, but hinted that future moves would not be as strong. Market prices for September are currently split, with traders assigning nearly equal odds to a half-point or three-quarters point rate hike, so any new signals could swing the pendulum.

Fed Board Governor Bowman will speak shortly after. Financial conditions have eased of late, with bond yields falling and stock markets rallying, which is counterproductive for a Fed trying to get inflation under control. Bowman could fend off this phenomenon and “massage” market expectations after the minutes.

On the off chance that she speaks of a big play on future rate hikes and tighter financial conditions, that could boost the dollar, help the euro/dollar break below the 1.0100 region and aim for another test. of parity.

On the other hand, a disappointing batch of data or a cautious minute signal could allow for a relief rally in the pair, with the first upside barrier likely to be the 1.0280 area. That said, even if the Euro/Dollar trades up to 1.0350, around 200 pips, it would still be stuck in a clear downtrend.

A bigger picture

Beyond this week, it is still difficult to envisage a trend reversal for the dollar. For this “strong dollar” dynamic to change, the landscape for the rest of the world must first improve.

A nuclear deal with Iran that would lower oil prices would be a good start, but the real change would be a ceasefire in Ukraine. China’s abandonment of its zero covid strategy could also be decisive. Until then, the “dollar king” is unlikely to lose his crown.

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