retail sales report

USD/CAD approaches key support The Canadian dollar initially weakened after headline inflation fell to a 27-month low, dropping from 3.4% to 2.8%, more than the eyed 3.0% consensus estimate.  The rates that the BOC focuses on, the so-called trim and median core rates, were a little sticky, which could suggest underlying price pressures are still too high.  The Canadian dollar has been rallying but if global slowdown fears increase, that could keep the Loonie locked in its longer-term consolidating range. The Canadian dollar has major support from the trendline beginning last June.  If price breaks below the upward sloping trendline, bearish momentum could target the 1.3020 level.  A daily close below 1.2950 could open the door for selling momentum to target the 1.2750 area. Inflation is making its way towards the BOC’s 2% inflation target, but it seems more tightening might not be needed to get inflation there. If Friday’s retail sales report shows the consumer remains resilient, that could trigger further Canadian dollar strength.  

Both the advance and core (ex-auto) retail sales monthly reading post third straight gain Fed rate hike odds stand at 93.6% for July 26th meeting ECB odds for a July rate hike stand at 93.2%. while September falls to 60.1% US stocks are lower after a retail sales report confirmed the US economy is still healthy and ready for another quarter-point rate rise by the Fed.     It was a busy morning as Morgan Stanley posted mixed results, while Bank of America impressed.  We are done with the majority of the big banks and the overall takeaway is that they did ok despite all the turmoil that stemmed from the regional banking crisis last quarter.  Wall Street knows this earnings season will have everyone calling this a challenging market environment, but optimism might remain that a resilient US economy should translate into decent spending despite all the headwinds.       US Data Last major data check paves the way for one more quarter-point rate rise by the Fed.  The June retail sales report was mixed, but overall painted a picture of a resilient US consumer.  Headline retail sales gain of 0.2%, was less than both the 0.5% consensus estimate and upwardly revised prior reading.  This was the third straight monthly increase, which was bolstered by online sales.  The headline was dragged down by gasoline and building material demand weakness, but clear signs are emerging that the economy is slowing down.     Industrial production tumbled in June as auto production slumped for a second month as the economy weakens.  Demands for goods are weakening and the strong auto production numbers are coming back down. Fed swaps initially were fully pricing in a quarter-point rate rise by the Fed.  If inflation continues to come down, labor market resilience should drive expectations that Americans will still consume, albeit at a slower pace.      

Analysis of GBP/USD 5M   GBP/USD traded higher on Thursday, in contrast to the EUR/USD, which saw growth. Volatility increased slightly, but this doesn't change the fact that the pair is still trading within a sideways channel. The pair could move in any direction within such a channel, so it could be quite chaotic. Since the lower band of this channel was the last target, it makes sense that the pair is now moving towards the upper band. The pair does not need any macroeconomic or fundamental background for this movement. And there wasn't any yesterday, as there was nothing to note except for the neutral report on US unemployment claims. As a result, we are currently observing purely technical movements within the flat. On the other hand, yesterday's technical signals were practically ideal, especially in the first half of the day. The Kijun-sen line needed to be adjusted as it moved to the 1.2700 level during the day. The pair bounced off this level during the European trading session. Subsequently, it started a fairly strong upward move, overcame the Senkou Span B line, and reached the 1.2786 mark, where traders should have taken profit. It was about 60 pips. The rebound from 1.2786 should also have been executed using a short position. The price started to fall, overcame the Senkou Span B line once again, and there were no buy signals. Therefore, short positions should have been closed manually closer to the evening. The profit for them was about 35 pips.   COT report:   According to the latest report, the non-commercial group of traders closed 8,900 long positions and 6,300 short ones. Thus, the net position of non-commercial traders fell by almost 2,600 positions in a week. The net position has been steadily growing over the past 11 months as well as the pound sterling. Now, the net position has advanced markedly. This is why the pair will hardly maintain its bullish momentum. I believe that a long and protracted downward movement should begin. COT reports signal a slight growth of the British currency but it will not be able to rise in the long term. There are no drivers for opening new long positions. Slowly, sell signals are emerging on the 4-hour and 24-hour charts. The British currency has already grown by a total of 2,800 pips, from its absolute lows reached last year, which is a significant increase. Without a downward correction, the continuation of the uptrend will be illogical. However, there has been no logic in the pair's movements for quite some time. The market perceives the fundamental background one-sidedly, ignoring any data in favor of the dollar. The Non-commercial group of traders has a total of 83,200 long positions and 36,200 short ones. I remain skeptical about the long-term growth of the pound sterling, and the market has recently begun to pay attention to short positions.   Analysis of GBP/USD 1H On the 1H chart, the pound/dollar pair continues to trade within a sideways channel. The channel has slightly expanded, so the flat hasn't ended. The lines of the Ichimoku indicator are currently weak, but they worked very well in the market yesterday. However, false and inaccurate signals may form around them. Today, the pair could rise to the level of 1.2807 or something lower. On August 18, traders should pay attention to the following key levels: 1.2520, 1.2605-1.2620, 1.2693, 1.2786, 1.2863, 1.2981-1.2987, 1.3050. The Senkou Span B (1.2807) and Kijun-sen (1.2700) lines can also be sources of signals, e.g. rebounds and breakout of these levels and lines. It is recommended to set the Stop Loss orders at the breakeven level when the price moves in the right direction by 20 pips. The lines of the Ichimoku indicator can move during the day, which should be taken into account when determining trading signals. There are support and resistance levels that can be used to lock in profits. On Friday, the UK will release a report on retail sales. Nothing lined up for the UK. Therefore, macroeconomics will not have a significant impact on the pair's movement today either, and the price will likely trade within the sideways channel.   Description of the chart: Support and resistance levels are thick red lines near which the trend may end. They do not provide trading signals; The Kijun-sen and Senkou Span B lines are the lines of the Ichimoku indicator, plotted to the 1H timeframe from the 4H one. They provide trading signals; Extreme levels are thin red lines from which the price bounced earlier. They provide trading signals; Yellow lines are trend lines, trend channels, and any other technical patterns; Indicator 1 on the COT charts is the net position size for each category of traders; Indicator 2 on the COT charts is the net position size for the Non-commercial group.    

Overview of macroeconomic reports There are hardly any important reports on Friday. The euro area will release its final assessment of inflation for July, which is unlikely to differ from the preliminary assessment. Therefore, we do not expect any reaction to this data. The UK will publish a retail sales report, which is not that important. Therefore, we do not expect a strong market reaction to this report. Therefore, there will be no important events on Friday, and both pairs will likely continue their relatively weak movements. The pound is in a sideways channel, and the euro is in a weak downtrend.   Overview of fundamental events There is absolutely nothing to highlight among the fundamental events. No speeches by officials of the Federal Reserve, Bank of England, or the European Central Bank. Therefore, the market will focus on the macro data, but there are hardly any of those as well. It seems that we are in for another muted day.   Bottom line On Friday, we are expecting rather boring trades. We don't expect strong movements from either the pound or the euro, but that does not mean that they will not happen. Take note that the market can trade without reference to the fundamental and macroeconomic background. Main rules of the trading system: The strength of the signal is calculated by the time it took to form the signal (bounce/drop or overcoming the level). The less time it took, the stronger the signal. If two or more trades were opened near a certain level due to false signals, all subsequent signals from this level should be ignored. In a flat market, any currency pair can generate a lot of false signals or not generate them at all. But in any case, as soon as the first signs of a flat market are detected, it is better to stop trading. Trades are opened in the time interval between the beginning of the European session and the middle of the American one when all trades must be closed manually. On the 30-minute timeframe, you can trade based on MACD signals only on the condition of good volatility and provided that a trend is confirmed by the trend line or a trend channel. If two levels are located too close to each other (from 5 to 15 points), they should be considered as an area of support or resistance. Comments on charts Support and resistance levels are levels that serve as targets when opening long or short positions. Take Profit orders can be placed around them. Red lines are channels or trend lines that display the current trend and show which direction is preferable for trading now. The MACD (14,22,3) indicator, both histogram and signal line, is an auxiliary indicator that can also be used as a source of signals. Important speeches and reports (always found in the news calendar) can significantly influence the movement of a currency pair. Therefore, during their release, it is recommended to trade with utmost caution or to exit the market to avoid a sharp price reversal against the previous movement. Beginners trading in the forex market should remember that not every trade can be profitable. Developing a clear strategy and money management is the key to success in trading over a long period of time.  

Next week in the US, the last major reports will be released ahead of the September FOMC meeting. The general theme is likely to be higher inflation than seen as of late. All eyes will also be on UK wage data, which will be key for locking in another rate hike from the Bank of England. In Poland, we expect to see CPI to drop below 9%   US: The general theme likely to be higher inflation It is a very big week for US data as the last major reports ahead of the Federal Reserve’s September FOMC meeting come in. Consumer and producer price inflation, retail sales and industrial production are all due, with the general theme likely to be higher inflation than seen of late versus weaker activity relative to recent trends. Nonetheless, Federal Reserve officials are seemingly of the mindset that they will likely pause interest rate hikes again and re-evaluate in November with just 2bp of policy tightening priced for later this month. For inflation, we look for fairly big jumps in August’s month-on-month headline readings with upside risk relative to consensus predictions. Higher gasoline prices will be the main upside driver, but we also see the threat of a rebound in airfares and medical care costs, plus higher insurance prices. These factors are likely to also contribute to core CPI coming in at 0.3% MoM rather than the 0.2% figures we have seen in the previous two months. Slowing housing rents will be evident, but it may not be enough to offset as much as the market expects. Nonetheless, the year-on-year rate of core inflation will slow to perhaps 4.4%. We are hopeful we could get down to 4% YoY in the September report and not too far away from 3.5% in October. We would characterise these relatively firm MoM inflation prints as a temporary blip in what is likely to be an intensifying disinflationary trend. Indeed, it was interesting to see the Fed’s Beige Book characterise recent consumer spending strength as being led by tourism expenditure, which had been "surging". But the general sense was that this would be "the last stage of pent-up demand for leisure travel from the pandemic era". Moreover, other spending was softer, "especially on non-essential items". This may well show up in the retail sales report. We already know that auto volume sales fell quite heftily too, but remember this is a value figure and that higher prices, particularly for gasoline, will help keep overall retail sales just about in positive territory. But with savings being rapidly exhausted and credit card delinquencies on the rise, there are concerns that weaker numbers are coming – particularly with student loan repayments restarting, which will add to financial stresses on the household sector. Rounding out the reports, we expect industrial production to be much softer than the 1% jump seen last month. Manufacturing surveys continue to point to contraction, and weakness in the component could offset a bit of firmness in utilities and mining/drilling activities.      

US industry posts solid gains, inflation expectations plunge Another respectable industrial production report while the University of Michigan reported a big plunge in inflation expectations. All this should be music to the ears of the Federal Reserve as it seeks a soft landing for the economy and a return to 2% inflation.   Decent industrial output, but strike action could weigh in coming months As with the retail sales report, the US industrial production number beat expectations in August, but the downward revisions to July means that on balance the level of activity is broadly in line with what was expected. This has been a bit of a trend of late with big prints subsequently getting some chunky downward revisions, be it in manufacturing, consumer spending, jobs or GDP. In terms of today’s numbers, US industrial production rose 0.4% in August versus the 01% expected, but there was a 0.3pp downward revision to July's growth (from 1% to 0.7%). Manufacturing rose 0.1% as expected, but there was a 0.1pp downward revisions to July from 0.5% to 0.4% growth. Auto output fell 5% month-on-month after a 5.1% jump the previous month with manufacturing ex vehicles rising 0.7%, led by a 2% jump in machinery manufacturing. Outside of manufacturing, which makes up 74% of total industrial output, utilities output rose 0.9% while mining increased 1.4%.  On balance the report is OK and is stronger than what is implied by the manufacturing ISM report, which has been in contraction territory for 10 consecutive months. However, auto output is up near record highs. Strip this out and the chart below shows there is a much tighter relationship between the ISM and non-auto related manufacturing. Today’s report won’t swing the Fed debate in either direction meaningfully. The key story for manufacturing next month will be how much the UAW strike action hits output. So far it is starting out modestly with just 12,700 on strike, but could quickly escalate and hit output hard.   ISM manufacturing index versus non-auto manufacturing output (YoY%)   US consumer inflation expectations fall sharply University of Michigan confidence fell more than expected to 67.7 from 69.5 (consensus 69.0). The perception on current conditions fell six points while expectations rose 0.8 points. Remember this index is much more responsive to inflation-related issues while the Conference Board measure of confidence is more reflective of the labour market (hence why the Conference Board suggests everything is great, with unemployment below 4%, yet the University of Michigan measure of sentiment suggests the world is on the cusp of falling apart).   Rising gasoline prices are the likely culprit depressing today's report as households feel the hit to spending power it generates elsewhere. Yet, rather bizarrely, we have some big declines in inflation expectations which should be music to the ears of the Fed. 1Y inflation expectations are down to 3.1% from 3.5% – it is actually below the current level of inflation – while 5-10Y expectations dropped from 3% to 2.7%. Both are really big surprises, but the usual caveat applies that they use fairly small sample sizes and things can swing. Nonethless, on balance this is further evidence that backs the Federal Reserve's claims that it can achieve a soft landing for the economy while returning inflation sustainably to target.