• Joel

USD Slips Initially On Soft Retail Sales Data

Going into today, many analysts expected EUR’s downwards trend to continue. Many predicted a double whammy for EUR in the form of weak Eurozone GDP data combined with strong US retail sales data.

Luckily for the Euro, this was not how things played out. US retail sales data was decidedly soft, as was industrial production data, while Eurozone GDP was mixed, or at least not terrible (many had started to expect after recent bad industrial production data).

In more detail; the US retail sales report saw both the headline and core M/M readings for January print in line with expectations at 0.3%. However, both saw their December numbers revised slightly lower. Moreover, the retail control (which goes into the creating of PCE inflation data) was softer than expected, not growing at all in January against expectations for a 0.3% rise. According to Pantheon Macroeconomics, the culprit behind the weak retail control reading was a huge 3.1% decline in January clothing sales, following a 2.7% jump in December. Industrial Production data was also weak, contracting slightly faster than market forecasts at -0.3% M/M in January.

Pantheon conclude that although the downward revisions to the headline and core retail sales readings for December will shave 0.1% off of Q4 GDP growth, the big picture is the same; “the consumer is fine”, they say. One thing I would add is, ok the consumer is fine, but this data doesn’t even reflect the impact of coronavirus yet. Will the consumer still be fine in February? That is a much more interesting question.

In terms of the Eurozone GDP data this morning; German GDP data was mixed, with the economy stagnated (i.e. Q/Q growth was 0.0%) in Q4 (vs expectations for 0.1% growth), but Q3 growth was revised higher to 0.2% Q/Q. Moreover, Germany’s Y/Y economic growth rate in Q4 was higher than expected, at 0.3% vs forecasts for 0.2%. Eurozone aggregate GDP figures were in line with expectations for Q4 Q/Q growth, although the Y/Y growth rate was a touch soft.

In sum, this has been enough to allow EURUSD to bounce slightly; the cross has managed to reclaim the 1.0850 handle from prior lows around 1.0830. Time and time again, we have seen rallies in EURUSD sold, but we have also sell-offs bought. Could this be the start of another bottom? Certainly, after USD's bull-run in recent days, some profit-taking and maybe a small correction may be overdue.

Next week will be crucial for the near-term direction of EURUSD. The minutes from the Fed and ECB’s most recent meetings are unlikely to shake the boat too much. But will Eurozone and US PMI data, important lead indicators, continue to improve or will they be hit by the effects of coronavirus? If they are, this is likely to affect EUR worse, as it has in recent weeks, given that the Eurozone economy is more exposed to China and USD is seen as more of a safe haven given its high-interest rate yield – look at how much higher the Fed’s main interest rate is than the ECB’s. The difference is 2-2.25% per year, where would you rather park your cash?!!

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