The U.S. dollar index, a gauge of USD strength against six major global currencies, saw a 0.25% rise on Tuesday to trade around the 106.5 mark, following a 0.4% slide on Monday.
The boost followed the release of retail sales figures in the U.S., which rose 0.7% on the month — well above the Dow Jones estimate, according to a report by CNBC. The numbers are not adjusted for inflation, which means that consumers more than kept up with price increases throughout the month. The U.S. consumer price index (CPI), released last week, showed headline inflation up 0.4% in September.
The retail report holds significant weight in the Federal Reserve's deliberations on future monetary policy. Although markets are largely expecting the Fed to have finished its rate increases for this cycle, a robust consumer sector adds complexity to the equation.
Investors will be closely watching Federal Reserve (Fed) Chair Jerome Powell, who is scheduled to speak in New York on Thursday, amid a busy period of speeches by regional Fed presidents. Fed officials will notably observe a blackout period beginning on October 21 in preparation for the central bank's meeting, scheduled to run from October 31 to November 1.
Philadelphia Fed President Patrick Harker said on Monday that the central bank should avoid adding new economic pressure by raising borrowing costs.
"Absent a stark turn in what I see in the data and hear from contacts, and audiences like you, I believe that we are at the point where we can hold rates where they are," Reuters cited Parker as saying in a speech to the Mortgage Bankers Association's annual convention.
According to the CME's FedWatch tool, traders in Fed funds futures have factored in a roughly 7% probability of the central implementing rate hikes at its November meeting, and around a 35% chance of an interest rate hike occurring by December.
The U.S. currency has been supported by safe-haven flows from risk-off investors who piled into the greenback after the Hamas attack on southern Israel on October 7. The price of gold has also seen a resurgence given rising geopolitical tensions, as both USD and the yellow metal are seen as safe-haven assets.
In a comment cited by Reuters, Valentin Marinov, Credit Agricole CIB global head of G10 FX research and strategy, said the main drivers in broader currency markets continued to be tensions in the Middle East and elevated global bond yields.
"The key question for the markets remains the scope for further escalation [in the Middle East]. As long as oil prices remain well behaved in the face of geopolitical tensions, that will mean that cost-push inflation may not re-accelerate and, by implication, the Fed could stick to its recent more-dovish rhetoric. ruling out further rate hikes."
In a USD forecast shared by FXStreet, economists at Frankfurt-based Commerzbank wrote that the greenback was likely to remain in demand as a safe-haven asset given the tensions in the Middle East:
“As far as the data calendar is concerned, retail sales and industrial production data are due to be published in the US, which should at least attract some attention on the market. If the signs of a soft landing become stronger, this would also be positive for the USD, because it would mean that the Fed would probably not cut its key interest rate any time soon.
Of course, the data could disappoint today. But this would hardly be enough to dissuade economic optimists. This would therefore hardly weigh on the USD. And as long as there is no easing of the Middle East conflict, the USD is likely to remain in demand anyway.”
Chris Turner, Global Head of Markets at Dutch bank ING, said that the 106.75 level could prove key for the dollar index to break given a stronger-than-expected U.S. retail sales reading:
“Given that powerful US growth and the US 'exceptionalism' story has largely been based on the US consumer staying in work and spending, a softer retail sales figure could test some of the late arrivals to the long dollar trade. That should mean that DXY will struggle to break 106.75 resistance and instead may end up pressing intra-day support at 106.00.”
At the time of writing, the dollar index was mostly trading sideways at 106.18, down 0.06% on the day after rising by as much as 0.25% following the retail data release, as per MarketWatch.
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