US Retail Sales Decline Unexpectedly

On Friday, August 14, the US dollar fell against a basket of major currencies, including the euro and sterling, following a surprise drop in US retail sales for the month of July. The dollar index, which measures the value of the greenback against a basket of currencies, including the yen and the euro, fell 0.25% to 99.67.

Retail sales in the US dropped 0.6% in July, a decline that was not predicted by economists polled by Reuters. The forecast had predicted a slight increase of 0.1% in retail sales for the same period. This unexpected decline in sales has raised concerns about the overall state of the US economy, particularly in terms of consumer spending.

‘We are clearly seeing signs of poor consumption,’ said Juan Perez, director of trading at Monex USA in Washington. ‘This evidence is clearly showing that there is an economic slowdown in the United States.’ The concerns about consumer spending are compounded by the recent data on consumer and producer price inflation, which has tempered expectations that the Federal Reserve will raise interest rates at its September 15-16 meeting.

Traders Weigh in on the Fed’s Next Move

Traders are now pricing in a 31% probability of a September rate hike, alongside a 69% chance of a rate increase by December. The uncertainty surrounding the Fed’s next move has contributed to the dollar’s decline, as investors become increasingly cautious about the potential impact on the US economy.

The euro, which rose 0.32% to $1.1564, has reached its highest level since June 17. Sterling strengthened 0.33% to $1.353, reaching its highest level since May 12. The Japanese yen, on the other hand, strengthened 0.08% to 159.37 per dollar, but is on track for a weekly decline of around 1%.

Crude Oil Prices Climb Amid Tensions

The recent attacks on tankers and a war of words between the Trump administration and Iran’s leadership have contributed to a rise in crude oil prices. This development has further added to the uncertainty surrounding the global economy, making it even more challenging for traders to predict the next move of the Fed.

The Bank of Japan is set to raise interest rates as soon as September and is considering more aggressive hikes to follow. Since exiting a massive stimulus program in 2024, the Bank of Japan has raised interest rates at a pace of roughly twice a year, including in June, when it took rates to a 31-year high of 1%. Most fund managers surveyed by Bank of America believe that a 2% terminal rate could stabilize the currency, which would mean four more 25-basis-point hikes.

The Yen’s Plunge and the BOJ’s Next Move

The yen’s recent decline has been attributed to the failure of recent interventions to turn sentiment around. Analysts at Bank of America have stated that the yen’s bearishness has increased considerably over the past month, reaching four-year highs. The yen was trading at 40-year lows near 164 per dollar before July’s intervention, and traders see the 160 level as a potential trigger for fresh official action.

The recent interventions have failed to arrest the yen’s slide, and traders are now betting that either a rate hike or another round of official buying will be needed to stabilize the currency. The Bank of Japan’s next move will be closely watched, as it attempts to balance the need to control inflation with the need to support the economy.

The US labor market has also shown signs of weakness, with the payrolls report showing that employers shed jobs unexpectedly in July. This development has added to the uncertainty surrounding the US economy and has contributed to the dollar’s decline.