The US dollar suffered from the poor retail sales report but then recovered as it remains the “cleanest shirt in the dirty pile”. What’s next? We may have to wait until the Jackson Hole Symposium, explain the team at Barclays:
Here is their view, courtesy of eFXnews:
We expect the USD to trade sideways against G3 this week and probably with a weak tone vis-Ã -vis high-yielding currencies.
Despite a benign labour market outlook, other US economic indicators still lack momentum. Retail sales last week were the latest important release. They showed a flat reading through July (Control Group), a worrisome sign, as consumption is the main driver of US economic growth. Although we do think that a September hike is still possible and that the probability of a hike in the months to come should stay closer to 50% (throughout December), global monetary easing, political events in the months ahead and an uneven recovery continue to tilt risks toward no hikes.
In that regard, although we do not expect a material depreciation of the USD, we think it will be difficult for the USD to rally until we get further clarity on the Fed’s intentions. Jackson Hole could be the setting if Fed Chair Janet Yellen wants to send a signal to the market.
We look to the minutes (Wednesday) of the July FOMC meeting for clarification as to which ”near-term risks to the economic outlook” the statement judged as having diminished. Some members’ speeches since then have indicated a shift in focus from expected to realized inflation. That will give more relevance to CPI release (Tuesday).
We expect headline CPI to have been flat for the month and to have risen 0.9% y/y while core CPI should be up 0.2% m/m and 2.3% y/y. Core and headline inflation have both moved higher in recent months as the direct drag from the 2014 decline in energy prices and dollar strength has abated. Domestic price pressures have continued to build up as slack in the economy has diminished, providing the main driver for higher inflation.
Finally, we think Lockhart’s speech should be closely watched because, although he is a non-voter, he has been a reliable bellwether of committee thinking and this will be his first speech after the employment report. He will take questions from the audience and media.
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