Hawkish Dollar mixed after soft US retail sale


  • ECB President Lagarde strikes hawkish tone during communications on Thursday, but euro
    underperforms most of its major peers.
  • Dollar puts in a mixed performance after contrasting data. US retail sales on its worst run in two years, but drop in initial jobless claims points to strong labour market.
  • Antipodean currencies underperform after weak Australian labour report. JPY recovers losses after BoJ inaction, while sterling remains well bid on improving growth outlook.

Trading in the foreign exchange market has been relatively choppy so far this week.

The US dollar has continued to trade largely on the back foot against most currencies, as investors bet that the
Federal Reserve will end its rate hike cycle following its March policy meeting. Wednesday’s soft US retail sales
data further fuelled these expectations. Sales fell 1.1% month-on-month in December – a larger downturn than
the -0.8% consensus, and the biggest contraction in a year. We note that there was also a downward revision to
the November data, ensuring that sales experienced their largest three-month drop since December 2020 and
the height of the first winter lockdowns of the COVID-19 pandemic.

Figure 1: US Retail Sales (2021 – 2022)

It has not been all bad news for the world’s largest economy thus far this week. Housing data out on Thursday
was mixed, though housing starts comfortably beat expectations, while a sharp drop in initial jobless claims,
down to 190k in the week from 13th January from 205k, continued to point to a robust labour market. This
ensures that currencies have traded without a clear direction in the past couple of sessions, and the dollar has
found itself around the middle of the FX performance tracker in the past week.

The euro has largely been stuck in a narrow range, with some hawkish comments from ECB President Lagarde
failing to inspire a clear leg up in the common currency. Lagarde noted yesterday that the bank would ‘stay the
course until such a time when we have moved into restrictive territory for long enough so that we can return
inflation to 2% in a timely manner’. In our view, this is a clear signal that additional 50bp rate hikes are on the
way during at least the next couple of Governing Council meetings. There has been speculation this week that
the bank may revert back to a 25bp move in March, following a 50bp hike in February, but we have not seen
clear enough evidence of a downtrend in Euro Area inflation thus far, particularly in the core index, in order to
justify such a call.

Among the worst performing major currencies yesterday were the antipodean ones, notably the New Zealand
dollar. We see this as more a reaction in response to Thursday’s very underwhelming Australian labour report,
rather than the news of Jacinda Ardern’s resignation as New Zealand PM. Trading in the Japanese yen was
remarkably calm yesterday, following a hectic session on Wednesday, which saw the currency shed more than
2% of its value following the Bank of Japan’s surprise inaction, before recovering all of its losses. Meanwhile,
sterling continues to go from strength to strength, as markets come round to our long-held view that the
downturn in the UK economy may not be as bad as previously feared. This morning’s UK retail sales print will be
the main economic data releases today in an otherwise relatively quiet end to the week for currencies.

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