The U.S. dollar traded lower against all of the major currencies Wednesday despite hawkish FOMC minutes and good U.S. data. The Federal Reserve is on track to raise interest rates in March, especially after the 3.8% jump in retail sales last month. Economists expected the increase to be driven by auto and gas sales but, excluding autos, spending rose 3.3%, easily eclipsing the 0.8% forecast. Consumers appear unfazed by rising prices as they continued to spend. Although Omicron worries shaved 0.9% off spending at restaurants and bars, Americans turned to their computers, spending 14.5% more online. Furniture and motor vehicle sales were also robust. Industrial production rose 1.4%, three times more than expected. With inflation at a 40-year high and consumers shaking off Omicron fears, not only is a rate hike in March assured, but the risk of a 50bp hike is greater than 70% at this stage.
There were no surprises in the Fed minutes. Most participants said rates should rise at a faster pace than 2015, but that’s stating the obvious because the central bank raised rates in December 2015 and then waited a full year before tightening again. Given the persistence of high inflation, the Fed will also be looking at ending net asset purchases next month. The dollar sold off because there was no mention of the need for a more aggressive rate hike but, with the last inflation report coming out well after the January FOMC meeting, we’re sure that worries about price growth exceeding long-run goals intensified.
There are a few reasons why the U.S. dollar weakened today. First, there was no love for retail sales because investors are worried that demand growth has peaked with yields rising and equities falling. With 10-year Treasury yields above 2%, there was no additional push higher after the retail sales report and the lack of extension in U.S. yields prevented the dollar from moving upwards. Tomorrow’s Philadelphia Fed index and housing market reports will not help the dollar, as the Empire state survey turned negative for the first time in 20 months. Lastly, investors could be worried that higher inflation will also drive other central banks to accelerate their plans for tightening.
Speaking of inflation, consumer prices in Canada and the U.K. rose more than expected at the start of the year, lifting the Canadian dollar and British pound upwards. Both countries are expected to see interest rate hikes alongside the U.S. next month. The euro saw gains as well thanks, in part, to stronger industrial production.
The Australian and New Zealand dollars were the best performing currencies, but tonight’s Australian labor market numbers pose a risk for A$. According to the PMI reports, there was very little change in hiring in the month of January. New Zealand producer prices are due for release Friday morning local time and with CPI rising strongly at the end of the year, PPI is expected to be hot as well.
Traders should also keep an eye on the Iran and the Russia-Ukraine crisis headlines as they could have a notable effect on risk appetite.