Foreign exchange markets are looking to US Retail Sales data to guide investors’ expectations on the timing and size of a reduction in Fed QE efforts.

Talking Points

US Dollar May Rise as Retail Sales Data Boosts Fed QE “Taper” Speculation
Aussie Dollar Gains as Chinese 2Q GDP Fails to Advance Case for RBA Cuts

The economic calendar is quiet in European trading hours, with Switzerland’s Producer and Import Prices data amounting to the only bit of noteworthy event risk on the docket. This is likely to see traders looking ahead to US Retail Sales figures as speculation about the direction of Federal Reserve monetary policy remains a driving theme around the financial markets.

Markets seem to be coming around to the idea that last week’s much-discussed Ben Bernanke commentary marked clarification of the Fed’s policy trajectory rather than an about-face on the intention to taper asset purchases.This is likely to make for highly data-sensitive price action once again as traders resume refining expectations for the timing and size of the first reduction in QE. The Retail Sales report is likely to be interpreted within this context.

Receipts are expected to rise 0.8 percent, marking the largest increase in four months. The supportive outcome may be interpreted to suggest Ben Bernanke and company are on track to deliver the first cutback in stimulus at the September FOMC meeting (in line with what is emerging as the consensus view). This has scope to boost the US Dollar against its major counterparts, particularly in the context of last week’s losses. Needless to say, a downside surprise can be expected to carry the inverse implications.

The Australian Dollar outperformed in overnight trade after Chinese GDP figures printed in line with expectations, showing the year-on-year growth rate slowed to 7.5 percent in the second quarter. The response likely amounts to a relief rally reflecting fading risk of an increase in RBA rate cut bets that might have come in the wake of a disappointing result. Broadly speaking, the Aussie appears to be primed for correction higher absent negative cross-currents from US news-flow.

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