How could today’s US retail sales data impact FX?

This week has been a volatile one in the FX market and we could be in for more of the same today, particularly with the release of US retail sales data for April.

It has been an interesting few days for the US dollar. The greenback was under heavy selling pressure late last week following a very underwhelming nonfarm payrolls report, which calmed expectations that the US economy may be close to overheating. Wednesday’s inflation data has, however, painted an altogether different picture. Headline inflation rose at its fastest pace since 2009, while core price growth surged by the most since 1981. This has once again got investors and analysts alike questioning whether the Federal Reserve would be right to consider raising interest rates at a faster pace than policymakers are currently pencilling in.

The strength of today’s retail sales data is anyone’s guess at this point. Economists are forecasting a modest increase in sales of around 1% following the sharp 9.8% increase in March. Given the ongoing impressive vaccination progress in the US and the continued unwinding in virus restrictions, it's not unreasonable to expect a slightly stronger number than the market is currently pricing in. Another much stronger-than-expected print here would fuel additional bets in favour of a more hawkish Fed and could send the dollar racing back towards the 1.20 level versus the euro. A disappointing reading would, however, suggest that the recovery is perhaps losing a bit of steam and that the spike in US inflation may prove fleeting.

BoE’s Bailey stresses UK inflation spike to prove temporary

There was no major economic data out of either the UK or Euro Area on Thursday, and none set for release on Friday either. Sterling has spent the last 24 hours or so stuck within a narrow band. Governor of the Bank of England Andrew Bailey spoke on Thursday, although he failed to add anything that investors didn’t already know. Bailey stated that he thought upward pressure on inflation would prove temporary, but that the spike in consumer price growth in the US meant that he would be looking at the UK’s inflation situation more closely. Lockdown measures are set to be eased again in the UK as planned on Monday and there is a great deal of optimism surrounding the country’s economic outlook. Next week will see the release of inflation and retail sales data for April and it will be interesting to see whether the recent easing of restrictions is reflected in stronger readings here. If that were to be the case, we would expect sterling to test last week’s multi-month highs versus the dollar.

As mentioned, there has been little to report out of the Eurozone in the past couple of days, with no major economic data prints on tap. EUR/USD has been driven almost entirely by goings on in the US and we expect that to remain the case today.