Dollar gaining strength again in Forex market
2023.02.16 09:03
Dollar gaining strength again in Forex market
The strong rebound in US retail sales adds to hopes of a soft landing.
Even though it slowed down a little bit today, the US dollar continued to rise on Wednesday, outperforming all of the major currencies.
The stronger-than-expected January retail sales data from the United States may have provided additional fuel for the dollar. After declining for two consecutive months, headline and core sales rebounded strongly, exceeding analysts’ estimates by a significant margin. It is important to note that headline sales increased at the fastest rate in nearly two years. When combined with the acceleration in the month’s CPI, the stellar NFP gains, and the rebound in the ISM non-manufacturing PMI, the surge in headline sales raises hopes of a soft landing and further justifies investors’ decision to raise their projections regarding the Fed’s course of action.
The dollar’s support could last for some time longer if there is more evidence that the US economy might avoid a recession. However, calling for a long-term recovery is premature due to the abundance of US data on the economic agenda prior to the next Fed meeting, which is scheduled for March 21-22, including the employment and inflation reports for February. Today, the US PPI numbers are out, and if there is a decent slowdown, investors might reconsider their long positions and lock in some profits.
The pound falls as the BoE is relieved of pressure by slowing inflation.
Yesterday, as a result of the larger-than-anticipated slowdown in UK CPI data, the pound lost the most ground against the dollar. Although the headline rate is still in the double digits, the decline in the core rate may have increased expectations that the Bank of England is nearing the end of this tightening campaign. Both rates fell to 10.1% y/y and 5.8% y/y from 10.5% and 6.3%, respectively.
Governor Bailey stated that the BoE’s recent revision to its forward guidance reflects a turning point in the fight against inflation. The Bank had previously stated that it would “respond forcefully, as necessary,” but they have since stated that additional tightening would be required in the event that price pressures persist.
With food and non-alcoholic beverage inflation slowing to just 16.7% from a 45-year record of 16.8%, the risks of a severe recession in the UK have lessened. However, households are still experiencing a severe squeeze on their cost of living. Therefore, it is difficult to predict how quickly or slowly the Bank will need to move in the future. Currently, investors predict that the upcoming meeting will result in a 25bps increase of another 65 percent, with a 35% likelihood of no action. They only see one additional quarter-point increase after that before the Bank presses the stop button.
The BoE is seen as the softest of the three, with the Fed now expected to act more aggressively and the ECB expected to keep delivering double hikes. This makes the pound more susceptible to selling against the euro and the dollar.
Equities rise, but gold continues to fall.
Wall Street gained as well as the strong rebound in retail sales, with the tech-heavy Nasdaq rising the most. Investors appear willing to continue increasing their risk exposures as long as the data are pointing to a much better economic condition than previously estimated, despite the rise in Treasury yields on increasing expectations that the Fed may eventually need to take interest rates higher and refrain from cutting them this year.
Despite this, the larger picture remains largely unchanged following the retail sales release. Equity indices’ outlook remains neutral. Equity indices are unlikely to reach record highs given that interest rates are now expected to exceed 5% at the end of the year and earnings estimates are still being lowered. On the other hand, a number of major economies’ better-than-expected performance and the optimism surrounding China’s reopening are supporting factors.
Gold appears to be in danger from rising yields, a strong dollar, and a rising appetite for risk. Yesterday’s steep decline in the precious metal may soon reach the $1,825 support level.
