• USD Trades Higher as Retail Sales Beat Expectations
• EUR Tanks on Concerns about Sluggish Recovery
• GBP Tips Lower Amid Mild Increase in CPI
• AUD Steady Ahead of Jobs Report
• CAD Supported by New Highs in Oil and Rise in CPI

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The U.S. dollar traded sharply higher against most of the major currencies on Wednesday following strong retail sales. Consumers stepped up in the month of January, driving retail sales higher for the first time in 4 months. Retail sales rose 5.3%, more than four times the 1.2% forecast. Every category saw an increase as Americans took their $600 stimulus checks to the stores. Demand for electronics, furniture, and home furnishings were particularly strong but online spending increased as well. While the gain in the dollar suggests that investors were pleased to see the much-needed recovery in consumer demand, the slide in USD/JPY along with the intraday volatility in stocks suggests less enthusiasm. Stocks had been in negative territory for most of the day until the FOMC minutes were released. They turned higher only after the minutes revealed that Fed officials saw a considerably stronger outlook for 2021 relative to their December forecast.

There was no love for retail sales because investors are worried about the durability of the recovery. With only a nominal increase in non-farm payrolls last month and weaker wage growth, the fear is that spending could soften in February after the stimulus check boost in January. Even so, in the coming months spending will recover especially as the weather improves and more Americans are vaccinated. The House could pass President Biden’s stimulus bill as quickly as next week then it goes to the Senate. With an estimated 11.4 million workers set to lose their unemployment benefits between mid-March and April, the will to do a deal by mid-March is strong. So ultimately the concerns about a sustainable retail sales recovery should not be a big concern as we and the Fed see robust demand in the second, third and fourth quarters.

The weakest currency today was the euro. Despite a stronger ZEW survey, investors are worried about Friday’s PMI reports. Many countries in the Eurozone, Germany included remain in strict lockdown. Last week, Chancellor Angela Merkel said the restrictions would remain in place until at least March 7. By then it would have been more than 3 months since they were first introduced on November 2nd. With virus variants spreading quickly in Germany and vaccine rollout happening painfully slow, sentiment is very weak. If this continues, so will euro’s underperformance.

Sterling also traded lower following a mild improvement in consumer prices and fresh talk of negative interest rates. CPI dropped -0.2% in the month of January which was less than expected. At a year-over-year rate of 0.7%, inflation is far away from the central bank’s 2% target which is part of the reason why negative interest rates are still on the table. Still, according to Bank of England Deputy Governor Ramsden, bond buying or quantitative easing is their preferred approach. Negative interest rates are a contingency plan they don’t see a need for anytime soon. Beware of further losses in sterling as a sharp decline in retail sales is expected for Friday.

The Australian and Canadian dollars were unchanged while the New Zealand dollar logged off the day as the second-worst performer. AUD is holding strong ahead of tonight’s labor market report. According to the manufacturing and service sector PMIs, the job market was very strong last month. The Canadian dollar was supported by higher consumer prices and new highs in oil.