USD
Despite sliding through the early part of Monday trading, the broad dollar stabilised from mid-day onwards, with markets continuing to assess the merits of a 25bp vs 50bp cut from the Fed on Wednesday. With the decision hanging in the balance, at least according to market pricing, today’s retail sales data now takes on extra emphasis.
Economists expect to see retail sales ex-auto and gas rise by 0.2% MoM, while the advance reading is projected to decline by -0.2%, in effect signalling flatling consumer demand. An upside beat then would likely establish 25bps as the base case ahead of tomorrow’s rate decision. An undershoot, in contrast, is likely to add to fears around the strength of US household spending, and add credence to market speculation around a 50bp rate cut to start the Fed’s easing cycle. We continue to think the former outcome is more likely, suggesting that the dollar should strengthen over the coming days. However, considering the level of uncertainty in markets, significant volatility looks guaranteed in any case.
EUR
Today’s ZEW expectations data is the major data point of note for the eurozone this week. Even so, with all eyes on the Fed, the impact of this latest set of prints is likely to be limited. Consensus expectations look for another grim set of readings, with little to alter the narrative around the European economy. This leaves EURUSD fortunes in the hands of US retail sales this afternoon, and on the Fed tomorrow.
GBP
Even as the Fed grabs headlines, we would note that the BoE also has a rate decision this week. Moreover, like the FOMC, the MPC also faces a finely balanced decision. Tomorrow’s CPI should help tip the balance of risks, with markets pricing the odds of a rate cut of 25% as of this morning. Until then however, all eyes are on the US data and what that means for the Fed, with GBPUSD price action today likely to be dictated by events on the other side of the Atlantic.
CAD
As with other G10 currencies, US retail sales are likely to be closely studied by loonie traders. Indeed, we suspect it could be more significant for CAD than this afternoon’s CPI report. Unlike other currency pairs, however, USDCAD price action should remain relatively muted. Markets seem content to see BoC easing expectations move in line with those of the Fed, with no signs that a change is likely this afternoon. We think it will require Chair Powell to disabuse markets of this notion before USDCAD can chart new ranges, with the pair still stuck just shy of 1.36 ahead of Wednesday’s Fed announcement.
