Dollar Rises as Inflation, Retail Sales Beat Estimates

USD

The U.S. dollar was able to continue its momentum from yesterday’s session overnight, gaining modestly against all of its major European and Asian counterparts. The dollar found support yesterday as Federal Reserve Chair Janet Yellen testified before the Senate Banking Panel. She held her stance that “gradual” rate increases will be necessary and shrugged off questions about President Trump’s pending policy proposals affecting monetary policy in the near term. Yellen will be testifying in front of the House today and we expect her commentary to be in line with yesterday’s tone.

The greenback is extending its gains in early trading as a slew of data has beat expectations. The cost of living in the United States increased in January by the most since February of 2013. The consumer price index rose 0.6% on a month over month basis, a larger increase than the 0.3% predicted by economists. Year over year inflation also rose to 2.5%, higher than December’s yearly reading of 2.1%. Rising consumer costs will put pressure on the Fed to increase rates in the coming months. Indeed, the chances of a June rate hike have risen to 90%, up from 68% a week ago.

Advanced retail sales also impressed, adding to the dollar’s good fortune. Sales grew 0.4% in January, beating expectations of a 0.1% gain. In addition, December’s print was upwardly revised to 1.0% from 0.6%.

 

EUR

After gaining at the beginning of the week, the Euro is under pressure again today. With minimal data out of Eurozone today, the common currency has been the victim of widespread dollar strength.

Looking ahead, the Euro will see pressure as the odds that the French far-right presidential candidate rises. Marie Le Pen is arguing that France should leave the European Union and print a French-only currency. Odds are currently around 20%, but the uncertainty should continue to weigh on the Euro.

 

GBP

The British pound continues to languish against the U.S. dollar even after data showed an impressive improvement in the labor market. UK unemployment declined and a measure of the number of people working rose to a record in the fourth quarter. The unemployment rate is currently at 4.8%, the lowest in a decade. However, a closer look at the data showed weaker than expected wage growth (2.6% v. 2.8 exp). The data fits the Bank of England’s position that there is excess capacity in the U.K. economy and the market can add more jobs without boosting wages. Therefore, inflation should not shoot up quickly giving the Bank of England some flexibility on future rate hikes.