The US dollar lost ground against major forex counterparts despite bullish results in the morning’s key Advance Retail Sales report. Such losses were ascribed to renewed speculative currency interest, with many forex traders pouncing on dollar rallies to sell it against the euro and the Canadian dollar. Though the greenback firmed through later price action, it remains relatively clear that risks remain to the downside through short term trade.
The Euro initially slipped against the dollar on the strong Retail Sales figures, but the single currency posted a strong reversal and remained higher against the greenback through later trade. Price action in the British Pound was similar to that of the euro, with the Sterling over 100 points off of intraday lows at $2.0350. The Canadian dollar was unsurprisingly stronger against its US namesake, setting fresh 31-year lows in the moments following the retail sales report.
Positive US economic data seemingly fueled the domestic currency’s sell-off, as strong Advance Retail Sales and Producer Price Index figures were unable to stem dollar declines. The key spending numbers reflected the strongest gain in six months—instantly improving sentiment on the state of the domestic consumer. A simultaneous Producer Price Index report showed that price pressures remain elevated for US industries, as headline PPI showed its strongest year-over-year change since June of 2006.
The net result of both reports was to cut expectations that the US Federal Reserve would reduce interest rates at its October 31 meeting. In fact, Fed Funds futures left the probability of such an event at 32 percent—a substantial change from the 50 percent probability priced in just a week ago. Given that the US dollar has fallen on expectations that the FOMC would cut interest rates further through year end, such a shift in forecasts should theoretically boost the greenback. Yet traders clearly had other things in mind as they continued sending the dollar lower against major forex counterparts. This is the second consecutive day in which the dollar has failed to rally on bullish news, and such trends leave little hope for a substantive rebound for the downtrodden US currency.
The Dow Jones Industrial Average posted a much more positive reaction to morning economic data, trading 0.3 percent higher to 14,060 through mid-afternoon price action. Stock market bulls seemed unconcerned that morning events decreased the likelihood that the Federal Reserve would cut interest rates further, instead focusing on positive signs for the strength of retail consumption. The highly diversified S&P 500 index was similarly bid at +0.3 percent to 1,558, while the tech-heavy NASDAQ Composite added an impressive 0.8 percent to 2,795.
Short term Treasury yields rose significantly on the day’s economic reports, with the 2-year Note jumping 7 basis points in yield to 4.19 percent. Bond traders clearly scaled back expectations that the Fed would cut rates, sending key short-dated debt prices lower in the process. The 10-year yield was less affected, adding 3bp to 4.67 percent.
Written by David Rodríguez, Currency Analyst for DailyFX.com