A US Data Scare That Won't Matter
While today’s disappointing US retail sales data may temporarily slow down dollar gains, it won’t keep the Fed from tapering starting in September, as this week’s testimony from Ben Bernanke will likely reinforce.
Today’s surprise slowdown in US retail sales forced the US dollar (USD) to give up part of its early gains this morning. Overnight, the greenback enjoyed a nice rally, but with consumer spending rising by only half of what economists anticipated for the month of June, it may be difficult for the currency to remain positive in today's trade against the euro (EUR), British pound (GBP), and Canadian (CAD) and New Zealand (NZD) dollars.
While we don't expect major US dollar losses in the wake of today's news, especially against the Japanese yen (JPY), this data gives the central bank reason to maintain a more cautious approach.
Few will argue that the Federal Reserve is getting ready to taper this year, but how it chooses to do so could affect the market's reaction. The central bank could always taper less, or pause after a one-off move, which would moderate the market's reaction and give the economy some more breathing room while still reducing overall stimulus.
US retail sales slowed to 0.4% in the month of June, slipping from a downwardly revised growth of 0.5% the previous month. Excluding autos and gas, spending contracted for the first time in 12 months by 0.1%. These numbers indicate that consumer spending will contribute very little to GDP growth in the second quarter.
The largest decline was seen in building materials, but Americans also spent less on electronics, food and beverages, department store purchases, and other miscellaneous items. Despite the pickup in job growth, consumer appetite has been muted, and until we get a stronger recovery in consumption, the Federal Reserve will need to be very careful about how much stimulus is removed from the economy this year.
In other US economic news, manufacturing conditions in New York improved in the month of July. The Empire State manufacturing survey rose to 9.46 from 7.84, a sign that the sector is continuing to recover after contracting in May.
Today's US retail sales report will give Fed Chairman Ben Bernanke greater motivation to sound cautious and more dovish at his semi-annual testimony about the economy and monetary policy before the House on Wednesday and Senate on Thursday.
While we doubt the Fed has changed its mind about tapering asset purchases this year, Bernanke will spend most of his time in Washington reassuring Congress it will not send the economy into a downward spiral. To do so, he will stress that monetary policy will remain extremely accommodative and a rate hike is a long ways away.
The specific comments may not deviate much from his speech last week, but the two testimonies can be very market moving because tough grilling by Congress may force Bernanke to divulge more details about the Fed's plans for tapering.
Last week, Bernanke's dovish tone sent the dollar tumbling, and we were surprised by the magnitude of the correction because we did not feel that the comments altered the timing for tapering and did not warrant the sharp reversal in the greenback.
Barring any surprise deterioration in US data, we still believe the Fed will begin reducing asset purchases in September. With approximately two months before the next Federal Open Market Committee (FOMC) meeting, if the US economy continues to recover, the central bank may become more vocal about its plans, essentially preparing the market for a change in monetary policy. As that occurs, the process should revive the rally in the US dollar.
By Kathy Lien of BK Asset Management
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.