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Retail Sales Decrease, but Taper Talk Doesn't

Retail Sales Decrease, but Taper Talk Doesn't

Kathy Lien, Technical Strategist

Though today’s US retail sales data was slower than expected, the markets saw enough consumption to bid the dollar higher and sustain confidence about the prospects for Fed tapering starting in September.

The most important data point on the economic calendar this week is today’s US retail sales report. While the level of consumer spending was far from impressive, consumption was firm enough to sustain speculation that the Federal Reserve will taper asset purchases this year.

Retail sales growth slowed to 0.2% in the month of July, down from 0.6% in June, but excluding volatile auto and gas purchases, spending grew 0.4% after stagnating the prior month. The US dollar (USD) had been trading higher for most of the morning and extended its gains after the market learned that this was the fourth consecutive month of positive US retail sales growth.

We hoped to see retail sales grow by more than 0.7%, but based on the reaction in the foreign exchange market, it is clear that investors feel that the data is good enough to keep the hawks talking about reducing purchases over the next two months, which is good for the dollar.

At the same time, however, we do not feel that the data is strong enough to solidify expectations for Fed tapering, which means investors are left guessing as to how quickly the central bank will act. Until the release of the July Federal Open Market Committee (FOMC) meeting minutes on August 21 and the Jackson Hole Federal Reserve Summit on August 22, we won't get much additional clarity on where the central bank stands because the rest of the data this month is second tier in nature.

This suggests that while we have seen a nice rally in the US dollar in reaction to today’s retail sales data, we continue to see the EURUSD trading between 1.3100 and 1.3450 and GBPUSD between 1.53 and 1.57 in the near term.

See related: 2 Rock-Solid Ranges for EUR/USD, GBP/USD

The USDJPY, on the other hand, could be poised for additional gains because at the end of the day, the Fed is still gearing up to reduce asset purchases…the only question is, when?

There is significant resistance for USDJPY near 98.75, but ten-year Treasury yields have responded very positively to today's data, and if yields continue to rise, this level can be broken.

Atlanta Federal Reserve President Dennis Lockhart is scheduled to speak on the economy later today, but as a non-voting member of the FOMC this year, his comments will have limited impact on the dollar.

By Kathy Lien of BK Asset Management

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