Resilient Consumer Spending Data Lifts Dollar Again Last Week

The U.S. Dollar strengthened against major currencies during the week ended January 19 amidst strong Retail Sales data from the U.S. that implied resilient consumer spending despite high interest rates. Amidst hawkish commentary from Fed officials that caused a scaling back of rate cut expectations, the Dollar rallied against the euro, the British pound, the Australian Dollar as well as the Japanese Yen. The Dollar Index, a measure of the Dollar’s strength against a basket of 6 currencies also surged during the week.

Data released by the U.S. Census Bureau on Wednesday showed retail sales in the U.S. soaring 0.6 percent month-over-month in December, versus a 0.3 percent rise in November and surpassing forecasts of 0.4 percent. The biggest increase in retail sales in the past three months cast apprehensions about a widely expected early rate cut, lifting the Dollar.

The Dollar Index, which had closed at 102.40 on January 12 amidst an unexpected decline in producer price inflation rose to 103.29 by January 19, implying a jump of around 0.87 percent in a week’s time. The pair traded between the week’s low of 102.31 on Monday and the week’s high of 103.69 on Wednesday.

Fresh doubts about an immediate monetary policy pivot by the Federal Reserve dominated the sentiment for the Dollar. The decline in the number of Americans filing for unemployment benefits to 187 thousand, a level last seen in September 2022 also added to the headroom available to the Fed to keep rates higher for longer.

The Dollar’s surge coincided with a broad-based decline in rate cut expectations. The CME FedWatch tool showed rate cut expectations for the January review dropping to 2.1 percent on January 19, from 5.2 percent a week earlier. The target probabilities assigned to rate cuts in the March review also plunged to 47.2 percent on January 19, from 81 percent a week earlier. Likewise, the rate cut expectations for the May review dropped to 84.8 percent on January 19, from 100 percent a week earlier.

The EUR/USD pair dropped almost half a percent during the week spanning January 15 to 19 amidst data showing a contraction in the German economy in 2023. Despite ECB officials warning against rate cut optimism, the pair dropped to 1.0897, from 1.0949 a week earlier. The pair’s trading range during the week was between the high of 1.0969 recorded on Monday and the low of 1.0844 recorded on Wednesday.

The risk-sensitive pound too slipped against the Dollar during the week ended January 19 amidst a steady unemployment rate, a higher-than-expected inflation reading and an unexpected drop in retail sales. The GBP/USD pair dropped to 1.2700 from 1.2751 a week earlier resulting in a weekly decline of 0.40 percent. The pair touched a high of 1.2767 on Monday and a low of 1.2595 on Wednesday.

The Australian Dollar plunged 1.32 percent against the U.S. Dollar during the week ended January 19 amidst weak commodity prices, worsening consumer sentiment and a lower-than-expected GDP growth in trading partner China. The Australian Dollar slipped to $0.6597, from $0.6685 a week earlier, after touching a high of $0.6706 and a low of $0.6525.

The Japanese yen’s plunge against the U.S. Dollar during the week ended January 19 came amidst inflation readings falling to its lowest since June 2022, easing pressure on the Bank of Japan to move away from an ultra-dovish monetary policy stance. The USD/JPY pair which had finished trading on January 12 at 144.90 jumped to a high of 148.82 by Friday. The pair eventually closed at 148.14 implying a jump of 2.24 percent. The pair had touched a low of 144.87 on Monday.

On the horizon are Bank of Japan’s interest rate decision due late on Monday. Though the yen weakened considerably over the past week amidst continuing bets that the Bank of Japan would be forced to stick to its ultra dovish monetary policy stance, it has since recovered, dragging the USD/JPY pair to 147.81. Ahead of Thursday’s interest rate decision by the ECB, the EUR/USD pair is at 1.0892, whereas the GBP/USD pair is at 1.2727. The fourth quarter GDP update and the PCE-based inflation readings for December are due from the U.S. later in the week. Amidst the anxiety, the Dollar Index has decreased to 103.16 whereas the AUD/USD pair is at 0.6594.

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