How Will US Retail Sales Impact the Dollar? (page 1 of 2)

DailyFX Fundamentals 06-11-08

By Kathy Lien, Chief Strategist of DailyFX.com

Euro: Three Reasons Why a New High Will be Difficult

In yesterday's Daily Fundamentals, we talked about the factors contributing to the rise in the US dollar and how much further it could rise.

Today, we take the perspective of the Eurozone and 3 reasons why the Euro will have a hard time hitting a new high.

The tug of war between Bernanke and Trichet is now very apparent with the Wall Street Journal talking about how these two men are competing for the title of the most hawkish central banker.

On a near daily basis, we have heard hawkish comments from either the central bank governors or their cohorts. Despite this bias, today's comments from ECB member Stark may be the most important advice yet for Euro bulls and the first reason why a new high will be difficult to achieve. He said that even if the ECB raises interest rates, they are not looking at a series of rate increases.

Secondly, the yield curve for German government bonds has inverted. For the first time in close to 8 years, the spread between the 2 year and 10 year bonds have turned negative.

In the past, inversion of the 2-10 spread is a strong leading indicator of a serious downturn and possibly even a recession. Finally, Ireland will be holding a referendum on the EU's Lisbon Treaty tomorrow.

This treaty is far less important than the EU Constitution that was rejected in 2005.

If Ireland votes No on Thursday, the best we will see is mild Euro weakness and if they vote yes, we may only see a minor rally because more than 50 percent of the countries have already ratified the treaty.

How Will US Retail Sales Impact the Dollar?

US retail sales are due for release on Thursday and the degree of consumer spending will be a big focus for the currency market.

Despite a continued deterioration in the labor market, economists expect retail sales to have rebounded by 0.5 percent last month after having fallen 0.2 percent the prior month.

Excluding autos, sales are expected to rise 0.7 percent compared to a 0.5 percent rise in April. If retail sales are as strong as the market expects, the dollar could hit a 4 month high against the Japanese Yen and extend its gains against the Euro.

However, traders have to be careful because even if there is a pickup in consumer spending, Americans are probably only buying what they need and not spending money on any other discretionary items.

Unsurprisingly, the surge in food and oil prices are expected to be the primary contributor to higher spending as higher prices have increased the checkout bills for all Americans.

Despite the market's rosy forecast for consumer spending, don't rule out a disappointment. The International Council of Shopping Centers Chain Store Sales index has already reported a softer increase in consumer spending for the month of May.

The biggest drop was in apparel, furniture and department stores sales while the biggest gainers were discounters, drugs and wholesale clubs.

According to the Beige Book report released on Wednesday 10 out of the 12 districts also reported slower consumer spending while the remaining 2 (Boston and NY) reported mixed results.

Since the market has turned very bullish dollars after Bernanke confirmed that interest rates will be left unchanged at their next monetary policy meeting, traders could still shrug off any underlying weakness in the retail sales report.

British Pound Shrugs Off Weaker Economic Data

The British pound strengthened against the US dollar today despite weaker economic data.