Retail Sales strong despite higher inflation; DXY, EUR/USD

Last week, my colleague Matt Weller discussed the following regarding today’s Retail Sales print:

“Consumers are expected to have increased their spending by 1.2% m/m, with the core (ex-auto) figure rising 1.0% m/m. With global supply chains still gummed up, there’s a chance that many consumers pulled forward their Christmas shopping from the usual November window to October to avoid any risk of shipping delays ruining their holidays (…or was that just my wife?), so an upside surprise is possible from the US report, and similar dynamics are at play in the UK and Canada as well.”

Thus far, this analysis seems to have proved correct, at least for the US. Retail Sales rose 1.7% MoM and September’s reading was revised higher from 0.7% to 0.8%. In addition, the Retail Sales ex-autos print for October was 1.7% MoM. September’s print was revised down slightly from 0.8% to 0.7%, however that seems minute given the strong beat in the October print. Let’s go one step further: Retail Sales ex-autos/ex-gasoline was 1.4% MoM vs a downwardly revised September print of 0.5% vs 0.7%. The downward revision is also negligible considering the estimate for October was only 0.3%!

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What do these strong Retail Sales numbers mean? They mean that even in the face of 30-year highs in the Consumer price Index (CPI), the American consumer is willing to spend! (Note that the US Government also feels they can spend as aggressively as they would like). This data, along with much stronger than expected Industrial Production (1.6% MoM vs 0.7% expected) and Manufacturing Production (1.2% MoM vs 0.7% expected) released today, show that October is off to a great start and should provide a huge boost to Q4 GDP. Recall that the preliminary Q3 reading of US GDP was only 2% vs 6.7% in Q2.

What are economic indicators?

With stronger retail sales data and the recent strong inflation data, the US Dollar continues to head higher as markets feel the chances of the first interest rate increase has been moved forward to June. As a result, the US Dollar Index (DXY) continues to grind higher. However, the DXY is running into a confluence of resistance at prior support from June 2020, the top trendline of the upward sloping channel dating back to the May lows, and the 50% Fibonacci retracement from the March 2020 highs to the January lows. The resistance zone is between 95.71 and 96.10. There is also a double bottom pattern in play from the lows in early January and the lows in late May. The target is near 98.05. Note that the RSI has recently moved above 70 into overbought territory, increasing the risk of a pullback. If the DXY can push above this resistance, the next level is the 61.8% Fibonacci retracement of that same timeframe at 97.72. Support is back at the upward sloping trendline from 2011 (red) and horizontal support near 94.65.

Source: Tradingview, Stone X

As the US Dollar Index continues to make new highs on the year, EUR/USD continues to put in new lows on the year. The pair is trading near the bottom trendline of a downward sloping trendline near 1.1325. If price breaks below, the 61.8% Fibonacci retracement from the March 2020 low to the January highs comes into place near 1.1290. Additionally, EUR/USD can drop to horizontal support from March 2020 near 1.1145. Note that the RSI is in oversold territory, increasing the possibility of a bounce. Horizontal resistance above is at the November 5^th lows of 1.1513 and then the top, downward sloping trendline of the channel near 1.1665.

Source: Tradingview, Stone X

US Retail Sales were expected to be higher, and they delivered! Retail sales out of the UK and Canada are also due out towards the end of the week. Will their spending be just as high in October? If so, the DXY may be in for a pullback from resistance while the RSI tries to move back into neutral territory! In turn, EUR/USD would bounce. Watch for more volatility this week!

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