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U.S. Retail Sales Data no Game-Changer for Under-Pressure Dollar

- USD weakens as market ignores Syria strike, risk appetite returns.

- US retail sales rebound strongly from February slump, but it's not enough to shift the dial on overall economic growth.

© Nazli Sart, Adobe Stock

The US Dollar was seen under notable pressure at the start of the new week despite the latest volley of US retail sales data showing consumer spending rising faster than was expected during the month of March. 

Headline retail sales rose by 0.6% during the recent month, according to Census Bureau data, which is up from the -0.1% contraction seen in February and far ahead of the consensus for growth of 0.4%.

Core retail sales, which remove large ticket expenditures such as cars from the numbers because of their distortive effect, rose by 0.2% for the month. This was in line with market expectations. 

The better-than-expected headline result was almost entirely the result of a surge in car sales, which rebounded from a low base after having fallen steadily over the last few months.

"The three-month annualized rate of core retail sales for the first quarter is a slim 1.0%, compared to growth of 7.6% in Q4. So while today's figures show that US consumer spending ended the first quarter on a stronger footing, it still won't be a particularly strong contributer to Q1 GDP," says Andrew Grantham, an economist at CIBC Capital Markets.

Markets care about retail sales because consumer spending accounts for a sizeable portion of US GDP and so changes in spending on the "high street" can give investors insight into the current condition of the economy overall.

But, according to Katherine Judge a colleague of Grantham's at CIBC Capital Markets, the data is not enough to shift the dial on overall economic activity.

"Despite the upside surprise on headline retail sales for March, the comeback will not be enough to significantly boost Q1 growth. Weakness this quarter comes following strong spending at the end of last year, while residual seasonality in the data has also likely limited gains. That being said, tax cuts and a tighter labor market should support household spending going forward and we expect consumption to accelerate over the remainder of the year as a result," says Judge.

The US Dollar index was quoted 0.28% lower at 89.58 after having pared back part of its earlier 0.34% loss although the greenback was little changed against major currencies in the wake of the release. The Pound-to-Dollar rate was quoted 0.56% higher at 1.4308 while the Euro-to-Dollar rate was 0.34% higher at 1.2369.

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Dollar Sold in Risk-On Markets as Geopolitics Ignored by Traders

General market conditions are meanwhile not necessarily favourable to the Dollar with a strong start for US markets putting the Greenback under pressure.

"The market has shrugged off some of the recent flare-ups in geopolitical activity and instead may be turning its attention briefly back to fundamentals," says Mark McCormick, head of North American FX strategy at TD Securities.

The Dow Jones Index is trading half a percent higher at the time of writing, with the S&P 500 Index up 0.63%.

Monday's price action comes after US armed forces led a Saturday-attack on Syrian government installations alleged to be involved in the development of chemical weapons, which risked bringing the coalition into conflict with Russian forces operating in the Middle Eastern nation. 

Assurances from the White House that Saturday's bombing raid was just a "one-time" affair have seen markets largely shrug off the event, for now at least, enabling risk currencies and asset classes to push higher at the beginning of the week. 

"A notable change over the past few weeks has been the shift in the correlation between the USD and the SPX. The negative correlation has broken down, reflecting a possible rotation to a backdrop where good equity news is good for the buck," McCormick adds.

Monday's data comes at a pivotal point for the US Dollar, which has had almost a negative correlation with positive economic data and developments that are pro-growth at the global level during the last year. 

The theory goes that, with both US and global economic growth gathering pace it makes sense for investors to shun US assets in favour of more exotic markets offering potentially higher returns. Conversely, during periods of pessimism and risk-aversion across markes, the US currency has been able to attract a steady bid.

It remains unclear whether this pattern will hold over coming months although, regardless, there are grounds to think the greenback may fare better overall after the Federal Reserve hinted last week that it could raise US interest rates at a faster pace and to a higher level over coming years than markets give it credit for. 

The Fed cited a likely pace of faster economic growth in the years ahead, due mainly to President Donald Trump's tax reforms and other fiscal stimulus, which could lead inflation to remain over and above the 2% target for an extended period.

Already, the US consumer price index sits at 2.4% while the core consumer price index, which removes volatile food and energy items from the goods basket and so is seen as a better measure of domestically generated inflation pressures, also rose above the 2% target. 

Should markets come to view a pickup in the pace or level of Federal Reserve rate hikes as a realistic prospect over coming months then it may well prove supportive for the US Dollar given that American rates and bond yields already sit far and above their developed world peers.

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