Dollar stalls, turns to US retail sales for direction
XM Group | Jan 16, 2024 08:37AM ET
- US retail sales expected to have risen again in December
- Strong dataset could dampen speculation of rapid Fed rate cuts
- Data due at 13:30 GMT Wednesday, crucial for dollar’s path
Waiting for Fed rate cuts
The US economy put in a stellar performance last year. Real economic growth remained around 3%, fueled by resilient consumer spending, a tight labor market, and an enormous government deficit.
Meanwhile, inflation has declined at a steady pace, with some help from falling energy prices. That’s great news for American consumers, who are finally seeing their wages rise faster than prices. In other words, real income growth has finally turned positive.
With inflation cooling, markets have become increasingly confident that the Federal Reserve will soon begin to cut interest rates. The implied probability for a rate cut in March currently stands at 80%, while for the entire year, investors expect more than six rate cuts in total.
If incoming data remains resilient, leading traders to unwind some of those rate-cut bets, the dollar could benefit. Similarly, the outlook for the euro area economy is rather dark, making it difficult for the euro to sustain any advances.
In this sense, the upside risks surrounding the dollar seem to outweigh the downside risks, although the evolution of global risk appetite in the markets and geopolitical events will also play a crucial role.
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