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US Data the Dollar Is Counting on

US Data the Dollar Is Counting on

Kathy Lien, Technical Strategist

The dollar has been sputtering in recent weeks and has lost ground across the board, but this week’s US retail sales and consumer confidence data could be potential lifelines that help restore dollar strength.

The performance of the US dollar (USD) over the past month may have left some traders confused. Considering that the Federal Reserve is the only central bank talking about reducing stimulus, most people would assume that the dollar should be headed much higher. However, rather than extending its previous gains, the greenback weakened against most major currencies in July and has extended its losses so far in August.

Though we’re only a little more than a week into the new month, the dollar is already trading at one-month lows against the euro (EUR), British pound (GBP),and Japanese yen (JPY), leaving investors to wonder, what happened?

First and foremost, currencies generally like to take their cues from yields, and unfortunately, US Treasury yields stopped rising in July. The idea of reducing asset purchases should be negative for Treasury prices and positive for yields, but we have not seen much reaction in the bond market outside of the initial rally in June. As a result, it may be difficult for the greenback to resume its rise until bond investors are convinced that yields deserve to be higher.

Along these same lines, US economic data has been tepid, with more downside than upside surprises. In contrast, a number of German and UK economic reports have beaten expectations, helping the euro and sterling recover. Economic fundamentals in Japan haven't changed much, but when it comes to USDJPY, the primary focus is yield.

There wasn't much in the way of US data this past week, but a number of Federal Reserve Presidents threw their support behind tapering this year. Unfortunately, this failed to lend much support to the greenback, so in order for US yields to resume their rise and restore demand for dollars, we need some solid upside surprises in US economic data.

This week, the focus will shift back to the US, with retail sales, inflation, industrial production, housing, and consumer confidence numbers all scheduled for release. Consumer spending is the backbone of the US economy, and a strong rise in demand could be very positive for the dollar.

According to the International Council of Shopping Centers and Johnson Redbook, consumer consumption was healthy in the month of July, and if the data beats expectations, the dollar could stabilize. However, if the data falls short like the most recent non-farm payrolls (NFP) report, the dollar could extend its losses.

At the same time, we will also be keeping an eye on US stocks, which have struggled throughout early August but remain above support. This week's economic reports could determine whether that support holds.

The Most Important UK Event Risk This Week

Aside from the US dollar, the British pound should also receive quite a bit of focus in the coming week. Sterling has performed extremely well since the Bank of England (BoE) upgraded its GDP forecast, and the rally has taken the GBPUSD to an important resistance level at 1.5550, which is also the 200-day simple moving average (SMA). Whether or not this level is broken in a meaningful way will hinge on this week's top-tier event risks, however.

On the economic calendar this week is UK retail sales, employment, and inflation reports. For the most part, we are looking for firmer releases after the employment component of the PMI reports showed improvement in the labor market and the British Retail Consortium reported a solid increase in spending.

However, what may be more important than these releases will be the minutes from the most recent Bank of England meeting. If you recall, the monetary policy committee left its asset-purchase program unchanged and failed to release a statement last time. The question at hand is how many members, if any, voted in favor of more asset purchases, and also how many members voted for the new unemployment rate threshold. If the decision on a threshold was not unanimous, sterling could come under some selling pressure.

On Friday, UK trade data beat expectations, with the deficit shrinking to GBP 8.082 billion from GBP 8.491 billion the month prior. Imports increased, but the real story was exports, which hit a record high. Upside surprises like this have been critical in helping GBPUSD reach a six-week high.

Eurozone’s Core Economies Are Diverging

After rallying for three consecutive trading days, the euro slipped back against the US dollar on Friday. The only piece of noteworthy Eurozone data released was from France, and it showed that industrial production in the region's second-largest economy contracted by 1.4% in the month of June. This was the largest decline in nine months and highlights the divergence in the economic performance between France and Germany, the region's two largest economies.

Earlier in the week, Germany reported a 2.4% increase in industrial production, and like the US and UK, there are a number of key Eurozone economic reports scheduled for release this week as well. The most important will be the German ZEW survey and Eurozone Q2 GDP figures. Growth in the Eurozone is finally expected to turn positive after six quarters of contraction, but the expansion will be meager (0.2% estimated).

As a result, we still expect the euro to trade in a wide range in the coming week. The two most significant event risks for the EURUSD will be the US retail sales and German GDP reports, and the performance of the currency pair will hinge on which release delivers the larger surprise.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.