Another white-hot US data point – retail sales the highest since March 2021. UK CPI falls further than expected, but remains in double digits, GBP falls

By Stuart Talman, XE currency strategist

The US dollar extended higher through Wednesday’s sessions, buoyed by the narrative that the US economy is proving too resilient despite the Fed’s 450bps of tightening. US retail sales for January yet another data point that surprised to the upside, raising questions over how many additional rate hikes will be required during this cycle.

The New Zealand dollar had attempted to reclaim territory north of 64 cents on multiple occasions over the past week, failing and forming a double top, suggesting that in the short term, the upside bias has ceased.

Marking yesterday’s high at 0.6390, the Kiwi was offered throughout Wednesday’s local and offshore sessions, one-way trade pushing NZDUSD back through 63 US cents.

Logging overnight lows a couple of pips above 0.6250, it’s the lowest the Kiwi has traded since 06 January when the NZD and other risk sensitive assets were propelled higher by a December US jobs report that provided encouraging signs that upside wages pressures were easing.

Now we have the opposite dynamic – key macroeconomic data is running too hot leading to rates markets repricing the later stages of this cycle.

A little over a month ago, Fed fund futures were pricing in a terminal rate below 5% and below the Fed’s dot plot projections. A bullish adjustment over the past few weeks now sees pricing aligned with the Fed on the end-point of 5.25%.

In addition, rate cuts are being priced out of 2H, now calling for 25bps of easing. Previously the Fed funds futures curve had called for circa 50bps of easing.

A further hawkish repricing, for example terminal rate expectations lurching higher to near 6% will surely end the market’s complacency, likely the catalyst for a downside washout.

As we mentioned yesterday, the incoming data flow will dictate the market’s mood…..data that runs too hot is bad data.

Retail sales for January unexpectedly jumped 3% month-over-month, the largest increase since March of 2021 and way above market forecasts of a 1.8% rise. It follows monthly declines for both November and December. Weather was a factor – the warmer conditions compelling consumers in the US to head outside and spend following a bleak December.

Having received both ultra-strong jobs and retail sales reports, the market will be scrutinising next month’s data points to confirm if this month’s editions were outliers.

Given weather played a role, they may prove to be.

The other major data point from Wednesday was UK CPI. The annual inflation rate in the UK fell to 10.1% in January from 10.5% in December, below market forecasts of 10.3%. Inflation fell for a third consecutive month to the lowest since September last year.

UK inflation peaked at 11.1% in October.

The Bank of England is still on track to hike by 25bps in March (to 4.25%) and may pause in May should the data flow continue to show softer economic activity whilst inflation continues to pullback from 40+ year highs.

Sitting atop the G10 leader board yesterday, the pound competes with the Aussie dollar for the bottom rung on Wednesday’s ladder, falling close to 1.50%.

Rebounding off the 200-day moving average, NZDGBP feeds back into the mid-point of the range that has constrained price action for the past few months……you could forgive traders for drifting off – the pair’s tight range makes for uninspiring trading conditions.

A break above 0.53 or below 0.5150 is required to signal an end to the sideways yawn-fest.

The day ahead, on paper, looks to be an uneventful one, Aussie jobs numbers the sole tier 1 data release. The jobless rate is expected to remain at 3.5% with circa 20K new jobs. A stronger than expected report would add to the recent hawkish momentum, firming odds for at least another two 25bos hikes in March and April.

The Kiwi continues to favour the downside against the Aussie, yet to show any basing signs, although the velocity of the decline has slowed over the past few weeks.

As both the RBNZ and RBA progress towards the end of their respective tightening cycles, we look for NZDAUD to enter a period of consolidative trade, ranging between 0.9000 and 0.9300.

US PPI is the sole offshore data point of note.

Having eased below the 23.6% Fibonacci retracement of the October-January rebound, located at 0.6296, expectations are for further downside as the market continues to re-assess the outlook for late-cycle Fed policy.

The 38.2% Fib level is located at 0.6146 whilst 0.62 provided stout support in early January as risk assets were propelled higher. Should US yields continue to rise or hold their ground, this 0.6150 – 0.6200 region is likely tested.

Stuart Talman is Director of Sales at XE. You can contact him here.