US Dollar Slips After Retail Sales Disappoint and Producer Prices Rise; Tariff Threat Lingers

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"Those concerns have been heightened further by a Reuters report, which claimed that President Trump is seeking to impose tariffs of up to USD60 billion on Chinese imports...," - MUFG

The US Dollar slipped during noon trading in London Wednesday after official data revealed a poor performance from American retailers in February, while producer price inflation surprised on the upside for the month.

Headline retail sales fell by -0.1% during February, deepening the -0.3% contraction seen in January, when markets had expected a 0.3% rise.

Core retail sales, a measure which remove big ticket automobiles from the numbers, grew by a lowly 0.2% when markets had anticipated a stronger 0.4% would follow January’s print of 0% growth.

"It's looking like a frosty opening to 2018 for US retailers. Headline sales undershot expectations, falling 0.1% in February. While that came with an upward revision of two ticks to January's readings, more stripped down measures were also underwhelming," says Royce Mendes, an economist at CIBC Capital Markets.

"With the headline dragged into negative territory by declines in both autos and gasoline, the core retailing number gain of only 0.1% came on the back of relatively broad-based weakness. The core readings for this year, which are better indicators of the trend in real consumption, have been weak, leaving us comfortable with our sub-consensus call of 1.9% for Q1 GDP."

Separately, a Bureau for Labor Statistics report showed producer prices rose by 0.2%, which is down from the 0.4% seen in January but above the 0.1% increase forecast by economists.

Core producer prices, which remove volatile food and energy items from the goods basket and so are seen as more representative of domestically generated inflation pressures, rose by 0.2%. This is down from the 0.4% seen in January but in line with market expectations.

Producer price data measures the change in prices that retailers are charged for the finished goods and services of producers. It is a leading indicator of consumer price inflation.

The US Dollar index was quoted 0.01% lower at 89.26 following the release, after reversing an earlier 0.07% gain, with the greenback ceding ground to many of its G10 rivals.

The Pound-to-Dollar rate quoted 0.12% higher at 1.3984 following the release, after reversing an earlier 02% loss, while the Euro-to-Dollar rate was 0.04% lower at 1.2387 after paring back a deeper loss.

Renewed weakness for the greenback follows a period of stability during the morning session Wednesday, with the US currency having arrested the previous session’s losses while markets digested nother threat of further trade tariff measures from the White House and dovish tones from the European Central Bank.

Wednesday’s data comes one day after President Donald Trump rocked the foreign exchange market when he announced that Secretary of State Rex Tillerson is being replaced with Central Intelligence Agency director Mike Pompeo.

The move prompted concerns about stability in the White House administration as well as fears of a pivot to a more hawkish and confrontational foreign policy, leading one strategist to observe a “White House chaos premium” is being priced into the Dollar.

"Those concerns have been heightened further by a Reuters report, which claimed that President Trump is seeking to impose tariffs of up to USD60 billion on Chinese imports, and will target the technology and communications sectors," says Lee Hardman, a currency analyst at MUFG.

"Kevin Brady, Chairman of the House Ways and Means Committee, has stressed that President Trump is serious about addressing intellectual property theft with China as part of the ongoing “section 301” investigation. Overall, the developments support our outlook or a weaker US dollar this year."

This announcement followed closely on the heels of a Bureau of Labor Statistics report showed headline inflation rising a fraction to 2.2% in February, while the core inflation rate held steady at 1.8%.

This came closely on the heels of muted wage growth figures for last month, which has seen the market’s earlier fears of a sudden surge in US inflation dissipate. As a result, pressure on the Federal Reserve to raise rates at a faster pace is also fading.

“The increase in the core CPI in February is unlikely to dent confidence that the FOMC will raise interest rates ¼ percentage point in their meeting next week, but nonetheless should reassure the members of the FOMC that the January data was a blip and inflation is not taking off strongly,” says Seth Parker, an economist at UBS.

The Federal Reserve is widely expected to announce its first 2018 interest rate rise next Wednesday, which will take the top end of the Federal Funds rate to 1.75%.

Pricing in interest rate derivatives markets, which enable investors to protect themselves against changes in interest rates and provide insight into expectations for monetary policy, implies more than a 100% probability of a rate hike next week.

Those same markets imply the top end of the Federal Funds rate range will be just less than 2.25% on Wednesday December 19, suggesting they are less convinced about the prospect of the Federal Reserve managing four rate hikes this year rather than the three it announced in 2017.

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