Will US retail sales add juice to the dollar’s rally? – Preview

Apr 12, 2024 at 8:30 am GMT- Marios Hadjikyriacos

• US retail sales will hit the markets at 12:30 GMT Monday 

• Early Easter holiday likely boosted consumer spending 

• Another solid dataset could put more wind in the dollar’s sails

 

US economy outperforms

By most indications, the US economy finished the first quarter on a high note. Incoming data point to a robust labor market, which has helped bolster consumer demand and in the process, reignited inflationary pressures. 

The Atlanta Fed estimates real economic growth hit an annualized pace of 2.4% in the first quarter, something reaffirmed by incoming business surveys. Heavy government spending and a surge in population growth amid an influx of immigration appear to be the driving forces behind this economic resilience. 

With mounting signs that growth and inflation are not cooling down, traders have continued to unwind bets of Fed rate cuts. Market pricing currently points to less than two cuts for this year, down from six just a few months ago. 

This sharp Fed repricing has propelled US yields higher, lending strength to the US dollar. 

Retail sales enjoy Easter boost

Turning to the upcoming dataset, retail sales are forecast to have risen by 0.3% on a monthly basis in March, a slowdown from the 0.6% in the previous month but still a solid print overall. 

It seems that the early Easter holiday pulled forward some spending into March, giving an artificial boost to retail sales, at the expense of April’s print. 

That said, some early indicators on card spending painted a mixed picture. Bank of America data pointed to a soft month for consumption, whereas Visa’s  spending momentum index continued to rise, signaling stronger demand. 

Given these conflicting signals, there is some scope for surprises in this dataset. Taking a look at the euro/dollar chart, a stronger-than-expected retail sales print could push the pair even lower, with the next major cluster of support likely to be found near the 1.0515 zone. 

On the flipside, a disappointment could help euro/dollar correct higher. A potential move back above the 1.0700 region could open the door for further upside extensions towards the 1.0800 area. 

Dollar outlook remains positive

In the big picture, the US economy seems stronger than other major regions at this stage, especially Europe. This economic divergence points to a situation where the European Central Bank might cut interest rates faster and deeper than the Fed does, which in turn could keep downside pressure on euro/dollar. 

Still, for the dollar to truly shine, it might also need some assistance from the risk sentiment channel. Given the dollar’s safe haven qualities, a period of risk aversion in the markets could go a long way in helping the reserve currency stage a more fierce rally. 

Indeed, with stock market valuations being stretched in an environment where US yields are rising, the risk of a correction in equities seems to be growing.