ECB Talks Down Euro As Dollar Falls On Retail Sales

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The retail sales report was the most important piece of U.S. data on this week’s calendar and unfortunately it provided zero support for the greenback. Economists were looking for consumer spending to rebound after falling -0.3% at the start of the year but instead sales dropped by -0.1%. Although rose by 0.3%, spending overall is anemic given the strong pace of job growth. Part of the problem is wages but the recent in the equity market also discouraged investors from big spending. The and U.S. stocks tumbled as a result but risk aversion overshadowed all else preventing pairs like and from rallying. rose more than expected but PPI is far less important than retail sales.

Thursday’s and manufacturing surveys could raise some eyebrows but the main focus will be political appointments as President Trump is widely expected to confirm Larry Kudlow as Gary Cohn’s replacement. Kudlow is a well known financial media personality and his appointment would reassure the market, providing near-term relief for and stocks. For the time being, 106 holds as support for USD/JPY, but a move above 107 would be needed to ease the negative flows.

The broke above 1.2400 during Asia trade but European Central Bank President brought it right back down at the start of the European session. Given his dovish comments at the last ECB meeting, his cautious comments were no surprise. He said policy must be patient and persistent because underlying inflation remains subdued and inflation needs to rise to end Quantitative Easing. He also added that the euro’s strength could weigh on inflation, which implies that the stronger the euro rises, the less inclined they will be to taper asset purchases. ECB members , and Villeroy all agree that inflation is low and the uniformity of everyone’s comments makes it clear that the central bank is in no rush to change its forward guidance. With no UK economic reports released Wednesday, sterling ended the day unchanged against the and higher versus the . No Brexit news is good news for the pound but the lack of progress is still worrisome.

Of the 3 commodity currencies, the was the best performer. Stronger , faster Chinese and positive comments from the Reserve Bank of Australia sent the currency sharply higher. According to RBA Assistant Governor , the “good growth we’re seeing, the low levels of spare capacity….raise the risk that inflation pressures will pick up.” He also felt that “markets may be underpricing the risk of faster growth.” As these are the most hawkish comments that we’ve heard from an RBA official, it was no surprise to see the big reaction in the Australian dollar. With that in mind, AUD/USD retreated from its highs during the NY session as the bounced off its lows. A close above 79 cents is needed before there is a new leg of strength. ended the day near its lows after having run as high as 1.2976. There was no specific catalyst outside of the big 1.30 resistance level. The lagged behind ahead of Wednesday night’s . With and improving at the end of the year, stronger growth is anticipated. If GDP beats expectations, we could see NZD/USD rise to 74 cents but the strongest move should be versus the euro as is at risk of dropping to 1.6750.