US Dollar: NFP-Inspired Rally May Be Exacerbated by FOMC Decision, Retail Sales

The US dollar rallied in response to surprisingly strong NFP results on August 7, which was surprising in that the currency has generally only traded as a “safe haven” asset. As a result, this coming week of price action in response to the Federal Reserve’s rate decision and US retail sales will be important as a gauge of what will drive the US dollar going forward: economic data or risk appetite.

[li]Federal Open Market Committee (FOMC) Rate Decision - August 12, 14:15 ET[/li] At 14:15 ET, the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, and this should remain the case throughout much of the year. In fact, the FOMC started saying in January that they continue “to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” and they went on to say something similar in March, April, and June. Furthermore, the last statement highlighted that the Committee’s policy focus is to support the functioning of financial markets via quantitative easing (QE) and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level. As long as we see these sorts of statements continue to be published, the news shouldn’t be too market-moving. However, the statement could spark heavy volatility if the FOMC announces an expansion of their QE efforts or elimination of them. Generally, signs that the central bank may increase Treasury purchases have been negative for the US dollar, but indications that they will complete the program within the next month or so could send the greenback spiraling higher.
[li]Euro-zone GDP (2Q A) - August 13, 5:00 ET[/li] In 2008, the release of Euro-zone CPI drew significant attention and sparked major volatility for the euro. However, indicators of growth have become more important, as the European Central Bank has shifted its focus away from inflation and on to the global and regional economic slowdown. As a result, traders should keep an eye on the advanced reading of Q2 GDP, which is forecasted to contract for the fifth straight quarter, this time at a rate of -0.5 percent, compared to -2.5 percent in Q1, while the year-over-year rate could fall by a record 5.1 percent. Such data would back up the ECB’s recent claims that the pace of contraction is “clearly slowing,” and if GDP falls less than anticipated, the euro could rally. On the other hand, a worse-than-expected decline in Q2 GDP could weigh on the currency.
[li]US Advance Retail Sales (JUL) - August 13, 8:30 ET[/li] The Commerce Department is forecasted to report that US retail sales rose 0.5 percent in July, which would mark the third straight improvement, and excluding autos, retail sales are anticipated to increase by 0.1 percent. However, the one factor that has led retail sales to rise in recent months could actually weigh on the index this month. Since the report is not adjusted for inflation, the steady increase in gas prices led the “gasoline station” component to surge 5 percent in both May and June, while all of the other components either rose less than 1 percent or fell negative. During July, though, average gas prices actually fell slightly (according to At the same time, we have to consider the impact of the “cash for clunkers” program, which has encouraged the buying of new vehicles and may prove to be supportive for the overall index.
[li]New Zealand Retail Sales (2Q) - August 13, 18:45 ET[/li] While the monthly reading of New Zealand retail sales for June are projected to reflect a decline of 0.3 percent, the Q2 result is anticipated to rise by 0.2 percent after a steep 2.9 percent drop in Q1, and it is this measure that could impact the New Zealand dollar the most. While a 0.2 percent increase isn’t remarkable by any means, it would be the first improvement in consumption since Q3 2007 and an encouraging sign that the severity of New Zealand’s recession is easing. As a result, a rise in quarterly retail sales that meets or is better than forecasts should offer a boost to the New Zealand dollar, but if spending surprisingly contracts for the sixth straight quarter, the currency may tumble.
[li]US University of Michigan Consumer Confidence (AUG P) - August 14, 9:55-10:00 ET[/li] The preliminary reading of the University of Michigan’s consumer confidence index is forecasted to rise to 69.0 in August from 66.0, which would be supportive of claims to the US economy is showing signs of recovery. Indeed, based on the latest US non-farm payrolls results, the pace of job losses has slowed markedly, which may help to boost investor sentiment. That said, the major issue we want to point out with this report is that the official time of release is 10:00 ET, but it typically hits the wires at 9:55 ET, which can exacerbate any surprise factor from the actual results.

[I][B]See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

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