With the US inflation report out of the way, dollar traders will turn their focus on the next edition of retail sales on Tuesday and the minutes of the latest FOMC meeting on Wednesday. Overall, it is becoming clear that the US economy is superior to its competitors at this stage, something that might be increasingly reflected in the FX arena moving forward.
US outperforms
The United States is currently the bright spot of the global economy. According to the Atlanta Fed GDPNow model, economic growth in the current quarter is running at around 4%, showing no signs of damage from the meteoric rise in interest rates.
Meanwhile, the labor market is still in great shape. The unemployment rate is hovering near its lowest levels in five decades and with inflation falling lately, real wage growth has returned to positive territory. If sustained, that would be a blessing for consumers.
But the most striking part is the housing sector, which has staged an impressive recovery. Home prices have reached new record highs in many parts of the country, even with mortgage rates hanging around 7%, amid a shortage of available homes for sale.
Add it all together and the US economy is firing on most cylinders, in sharp contrast to Europe and China, where storm clouds seem to be gathering. Business surveys suggest the Eurozone is teetering on the verge of recession, while Chinese growth is losing steam thanks to the troubles in global manufacturing.
Retail sales and Fed minutes eyed
Turning to the upcoming events, the ball will get rolling on Tuesday with the latest edition of US retail sales. Forecasts point to an acceleration in July, something supported by the latest card spending data from Bank of America, which showed a solid increase in consumption.
Then on Wednesday, the spotlight will turn to the minutes of the Fed’s July meeting that will be released at 18:00 GMT. This was the meeting where the Fed raised rates by a quarter-point, but was hesitant to signal any more. Hence, the minutes will be scrutinized for some color around this debate – did the majority of officials favor another rate hike or not?
Judging by the comments from various FOMC officials, it seems the consensus is that interest rates are unlikely to be raised again. That’s what market pricing suggests too, as futures imply only a 30% probability for another rate hike this year and point to rate cuts as early as March next year.
Dollar seems well positioned
Even if the Fed does not raise rates again, the dollar could still find some love. With the US economy so much stronger than its European and Chinese counterparts, it seems likely that investment flows will continue to favor the United States.
Generally speaking, capital does not flow into struggling economies. The US economy is not amazing, but foreign economies are much weaker. Hence, this relative economic outperformance might be increasingly reflected in the FX complex moving forward, tilting the risks surrounding euro/dollar to the downside.
Arguing in the same direction are the dynamics in the US bond market. Amid runaway government deficits, the Treasury has been forced to increase its bond issuance. This increase in bond supply exerts upward pressure on yields, which can benefit the dollar by making it more attractive through the channel of interest rate differentials.
Looking at the charts, the most important region to watch in euro/dollar is 1.0940. That is the 50% Fibonacci retracement of the entire 2021-2022 downtrend, where the 50- and 100-day moving averages have converged, and there’s also a trendline drawn from the September lows in the vicinity. The pair has rebounded from this zone several times lately, so a break lower would be an important technical signal.
