The Greenback managed to rally for a second week in a row, rising 3% from its 16-month trough in May-3. Thanks to the better than expected consumer spending figures which revived some hopes that the U.S. economy is back on strong footing from a sluggish first quarter. On Friday, U.S. retail sales showed a surge of 1.3% in spending, the largest gain in more than a year and beating the most optimistic forecast in Reuters polls. U.S. so-called core retail sales which excludes automobile, gasoline, building materials and food services sale, due to their volatility also gained by 0.9%, easily beating markets forecast of 0.3%. Confidence which has played a major role in dragging consumption also recovered sharply in May, as University of Michigan consumer sentiment index rose to 95.8, the highest since June last year.
Acceleration in consumer spending and confidence will certainly help putting back the rate hike back on the table and somehow indicate that the dollar has bottomed out in May. However, one exceptional release should be supported by other data, and this is why we’ll be monitoring closely next Tuesday’s U.S. consumer prices as the Fed needs a confirmation that inflation is on the rise to confidently pull the trigger on first rate hike this year. Core CPI has been running above 2% since December 2015, but lower energy prices continued to pressure the headline figure. Now with oil recovering by more than 70% from January lows the overall inflation is likely to start ticking up.
FOMC’s April minutes release on Wednesday will be another key event for U.S. dollar. The statement on April-27 was slightly more hawkish than what most market participants expected, however it was not strong enough to excite interest rates speculators, as June’s rate hike probability currently stands close to zero. While the fed removed the line 'global economic and financial developments continue to pose risks', they acknowledged that economic growth is slowing. The minutes will provide some key assessments on the outlook for inflation, growth, and the path of monetary policy tightening in what seems to be divided Fed members.
Mark Carney admitted on Thursday that the U.K. referendum may account for about half of the 9% drop in the pound in the past six months. But it seems there’s more than just the referendum moving the currency. The economy which has been running consistent trade deficits for almost two decades continued to deteriorate. According to leading indicators PMI’s, all sectors in the economy has weakened, wage growth and consumer spending also took a hit. This week will provide a fresh assessment on inflation, jobs, and retail sales. Although U.K. retail sales are expected to recover 0.5% in April, from a 1.3% slump in March, another drop in earnings growth, labor count, and core-CPI is likely to keep the pound under pressure. However, with only 38 days until the referendum to decide whether UK will remain or leave the European Union, polls will continue to dominate over data, so keep a close eye on them.
Other key economic data to watch this week is Japan’s GDP on Wednesday, which is expected to rebound from a 1.1% decline in Q4 2015, supported by private consumption. And from the Eurozone inflation data, and ECB Monetary Policy Meeting Accounts are likely to be the major moving events for the Euro.
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