"Unstoppable Consumer": Dollar Strength Aided by Retail Sales Beat

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The Dollar strengthened against the Pound, Euro and other major currencies after U.S. retail sales for December beat expectations.

The Dollar saw fresh bidding interest after it was revealed retail sales rose by 0.6% month-on-month, which was above consensus expectations for 0.4%.

The control group of retail sales rose by 0.8% m/m, compared to expectations of 0.2%.

"Can anything stop the American consumers? It doesn’t seem like it after another consensus smashing report with today’s December release," says Ali Jaffery, economist at CIBC Bank.

The strength was broad-based, with increases in 9 of the 13 categories.

Some of the largest increases were led by discretionary categories such as clothing, non-store retailers and general merchandise.

"Today’s report will reinforce the view of many in the FOMC that we do need restrictive policy for some time to allow the labour market to continue rebalancing," says Jaffery.

The Dollar is 2024's best-performing major currency owing to a repricing in U.S. rate cut expectations.

Investors have pushed back the expected timing of the first rate hike while also expecting less by way of interest rate rises than was the case at the start of the year.

The GBP to USD exchange rate was as high as 1.2696 earlier in the day but has retreated to 1.2643 in the wake of the retail sales. The EUR to USD pair has extended the day's loss to 1.0859.

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Falling inflation and rising real wages "could explain the strong consumption," says Jaffery.

Looking ahead, a weakening labour market suggests a "gradual moderation of consumption to a more sustainable pace in the winter months," he adds.

Meanwhile, analysts at Bank of America have released a new research update saying they are still looking for a decline in the U.S. dollar in 2024.

"While we see the USD depreciating broadly this year, it could still take some time, and our forecasts call for greater moves in H2," says Alex Cohen, an analyst at Bank of America.

Bank of America expects a normalised inflation environment and eventual rate cuts to allow for a greater decline in the USD.

"But until we get even more signs that inflation is comfortably pointing towards central bank targets, the timing and pace of USD depreciation can remain less certain," says Cohen.