U.S. Retail Sales Drives the Dollar Higher

After the U.S. nonfarm payrolls report blew expectations out of the water last Friday, it’s not surprising that analysts had bet that consumer activity would be strong as well. And boy were they right about that one!

Headline retail sales showed a whopping 1.1% growth in February, which is not only more than twice the expected 0.5% reading but is also the fastest rate since September. Even the core figure, which excludes volatile items such as fuel prices, surprised to the upside with a 1.0% growth.

Analysts first had doubts over consumer spending since a rise in gas prices coincided with the two-percentage-point increase in payroll tax that took effect at the start of the year. That didn’t stop consumers from spending though. The personal saving rate dropped to its lowest point since before the 2008 recession as many relied on credit cards and late tax refunds to support their activity.

It also helped that consumer confidence in general has been picking up, boosted by the recent improvements in the jobs sector. Low mortgage rates, stronger housing market, and easier credit access have also convinced some families to rent or buy new houses. Does this mean that Uncle Sam really is on the road to recovery?

The dollar bulls certainly thought so. As you can see in the chart below, the dollar started its climb even before U.S. retail sales data was released. This suggests that traders were anticipating strong results and were loading up on dollars early on.

Dollar Domination

Once the actual report came out, it confirmed the markets’ suspicions and gave traders the green light to buy the dollar aggressively. The rally wasn’t short-lived, either. It extended for a good two hours or so!

Looking ahead, the impressive retail sales report seems to suggest that we’ll see a stronger U.S. economy. In fact, two of the biggest financial firms in the U.S. have decided to upgrade their Q1 GDP projections for this year following the release of the retail sales report. JP Morgan, for instance, upgraded its GDP forecast to 2.3% from 1.5% while Goldman Sachs raised its own forecast to 2.9% from 2.6%.

Despite the upward revisions, I still doubt that the Fed will change its monetary policy stance. The central bank will want to see sustained strength in both the job market and housing sector first before even thinking about tightening policy.

For now, just enjoy the dollar rally from the strong data. We’ll be seeing more data on the consumer market on Friday, when the University of Michigan consumer sentiment survey gets published. If it shows another upside surprise, then we could see the dollar post more gains.

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