Further US Data Weakness Sinks USD

The US Dollar was knocked lower again this week as a further bout of data weakness has put a fresh focus on a potential rate cut at the upcoming October FOMC. September’s retail sales were heavily disappointing. The headline figure printed -0.3% on the month. This was in stark contrast to the expected 0.3% reading the market was looking for. The core figure was similarly weak at -0.1% versus an expected 0.2% reading projected by analysts ahead of the release.

Retail Sales Fall

The decline in retail sales last month marks the first such contraction in seven months and the breakdown of the data highlights severe weakness. Only five of the 13 sub-categories of the retail sales reading marked an increase over the month. This left eight in negative territory. The five categories which recorded an increase over the month were: furniture, health, clothing, miscellaneous, and eating/drinking.

Looking at the categories which fell into negative territory, the biggest declines were seen in motor vehicles/parts, which fell 0.9%, gasoline station sales, which fell 0.7%, and building materials, which fell 1%. On the year, department store sales are now down 7.3% on the year.

Employment Growth Slowing

Consumer spending has been the backbone of the US economy this year. However, with employment growth having clearly lost momentum over recent months and with wage growth coming in lower than expected, the market has become questioning how long consumer spending an continue to buoy the economy.

US Manufacturing Hits 10 Year Lows

This latest set of disappointing data comes not long after we saw a set of weaker than expected manufacturing and non-manufacturing readings for September. Manufacturing, in particular, hit its lowest level in 10 years last month. This illuminated the damage suffered by the US economy as a result of the President’s trade war with China.

Inflation Still Weak

The latest inflation readings were equally subdued with September CPI coming in flat. This marked its weakest reading since January. Headline CPI has trended steadily lower since October 2018 highs of 2.5% to the current 1.7%. Over the last four months, it has broadly been stalled. This has further underscored the lack of price pressure in the economy.

Market Looking For October Fed Rate Cut

At the September FOMC, the Fed cut rates by the expected .25%. However, the voting split showed a higher level of opposition than expected. As a result of this, the market began unwinding its expectations for further easing this year. Since that meeting, a steady stream of weaker-than-expected data has seen the market rebuilding its easing expectations. While December was initially the month penciled in for another rate cut, traders are now increasingly expecting that the Fed will cut rates again in October.

Technical Perspective

The USD Index continues to trade lower within the short-term bearish channel which has framed price action since the rejection at 99.26. Price is now testing support at the 97.77-97.57 level. With RSI showing bullish divergence we could see a further rotation higher within the range. However, if price breaks down through these levels, the next support zone to watch is the 97.18–96.99 area.