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The Fed's Last Chance for Clarity

The Fed's Last Chance for Clarity

Kathy Lien, Technical Strategist

Friday’s US retail sales report will be the final data point for FOMC voters to consider before next week’s much-anticipated policy meeting, although the data isn’t expected to make the Fed’s decision any easier.

Thursday was a mixed day for the US dollar (USD), which traded lower against the Japanese yen (JPY), higher against the Australian dollar (AUD) and New Zealand dollar (NZD), and unchanged against the euro (EUR), British pound (GBP), Canadian dollar (CAD), and Swiss franc (CHF).

After breaking briefly above 100 earlier this week, USDJPY rejected this level once again. Up until today, there were no US reports on the economic calendar, which means USDJPY weakness is a reflection of skepticism and hesitation ahead of next week's Federal Open Market Committee (FOMC) rate decision.

This morning, we learned that jobless claims dropped to the lowest level in seven years, but the admitted abnormal nature of the data meant that it elicited only a small reaction in the dollar.

See related: Standout US Data That’s Actually Bogus

Now, with less than a week to go before the FOMC monetary policy announcement, Friday’s US retail sales report is the last piece of data that could sway the central bank's decision.

Consumer spending is the backbone of the US economy, and even if job growth has been modest, if spending is strong, the Fed can confidently begin tapering asset purchases this month. Along those lines, a solid retail sales report could be just the push that policymakers need to give tapering a go.

However, the problem is that spending is not expected to be strong. Retail sales are expected to rise only 0.5%, up from 0.2% in July. Excluding spending on autos and gas, retail sales growth is forecasted to slow from 0.4% to 0.3%.

We believe that the risk is to the upside for the data, however, because according to the Johnson Redbook survey, spending improved last month, and even though the International Council of Shopping Centers reported a slowdown, the change was nominal.

Unfortunately, it would be wishful thinking to expect the data to be either so weak or so strong that it would make or break the Fed's decision. In all likelihood, retail sales continued to grow in the month of August, albeit at a sluggish pace that will leave the central bank with a very tough decision.

Unless retail sales rise by 1% or more, we expect the dollar to continue to weaken ahead of the FOMC rate decision next week. The University of Michigan consumer sentiment survey is also scheduled for release on Friday, and a small uptick is possible there.

By Kathy Lien of BK Asset Management

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

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