• Expected to see negative sales data, but not all bad
  • ECB is ready to buy bonds, euro under more pressure
  • Low inflation in the UK, a weaker pound

The US dollar was mixed yesterday.  With no major US data driving it, the greenback’s relative movements were dictated by the news from overseas.  For instance, the dollar slipped against the yen in the early morning hours when the Japanese government reported its current account deficit narrowed last month, assisted by falling oil prices that lowered the monthly import total.  Meanwhile, the dollar edged up against the euro as breaking news of the European Central Bank’s (ECB) intent of buying sovereign bonds at their next policy meeting on January 22nd flashed across the Bloomberg terminals around the world. There are indeed no quiet days in the foreign exchange market.

This morning, the dollar is expected to dictate its own direction after the release of December Retail Sales report from the US Census Bureau.  Analysts are forecasting December retails sales to drop by -0.1 percent compared to a monthly gain of 0.7 percent in November.  With less money spent at gas stations, the fall in retail sales will be mostly attributable to the plunge in oil price.  Therefore, analysts will be drilling down into the report to see if other “kinds of business” categories such as motor vehicle, food, clothing, etc. will show continued strength to keep the current recovery going this year.

Consumer spending makes up about 70 percent of economic activities. So, a recent plunge in oil prices should be a significant boost to domestic growth. Stagnant wages, which is a signature mark of the current recovery, may get in the way and mitigate its positive contribution. Consequently, the outcome of oil vs. wage tug of war over retail sales in the coming months will dictate the dollar’s next move.

EUR-USD came close to last week’s Friday low of 1.1763 and poised to test this support level today.  The euro came under more pressure yesterday as some of ECB policy makers stated publicly that the bank is ready to decide on bond purchases at the January 22nd council meeting.

GBP-USD fell below 1.5100 immediately after the release of December Consumer Price Index data yesterday morning, but later in the day, the pair managed to find support above 1.5100 for now.  The December inflation rate came in 0.5 percent, far below the Bank of England’s target rate of 2 percent.  Although the fall in inflation is deemed as transitory, mostly driven by falling prices, it would be hard for the bank to push for an interest rate increase anytime soon.

USD-CAD failed to break through the 1.2000 resistance level yesterday, as the oil price stabilized around $47 per barrel for now.  However, the odds are overwhelming that the USD-CAD will be moving higher shortly since low oil prices are beginning to have negative structural effects such as layoffs and falling investments particularly related to the energy industry.

Stay tuned.