The Fed will be watching Retail Sales

20 November, 2013

The United States are due to release a high quantity of important data on Wednesday. From a distance, I think market eyes will be focused on the FOMC minutes, alongside the latest inflation reading. Existing home sales and mortgage application are also due to be released.

However, I would not underestimate the importance regarding the latest U.S advanced retail sales release.

Why is it so important?:

The Federal Reserve has consistently maintained that when considering tapering their QE stimulus program, they will monitor two forms of data: job growth and consumer spending.

Consumer spending equates to around 70% of all US economic activity, with retail sales contributing towards one third of customer expenditure. Wednesday’s advanced retail sales could likely go some distance towards whether the Federal Reserve will taper their QE stimulus on the 18-19th December.

The US is showing gradual improvements:

Recently, there has been indications that the United States economy is strengthening. Their most recent GDP far exceeded expectations, attaining 2.8% expansion. Additionally, an impressive 204,000 jobs were created in October. Collectively, this heightened up optimism that the Federal Reserve may taper their QE program at next month’s FOMC.

In my opinion, we are forever receiving mixed signals from the Federal Reserve. Up until the latter part of last week, the recent economic resurgence triggered hawkish responses from the Fed, regarding a potential taper in December.

However, last week, Yellen clearly stated that she is in support of QE and will look to maintain the current program. Bearing in mind that Yellen is supposed to take over from Bernanke in January,  if the Federal Reserve do not taper in December, then it is unlikely that we will witness a QE taper for potentially some time, weakening the USD.   

To conclude, although there is a high volume of data to be released on Wednesday, it is likely that advanced retail sales is going to be under very close microscope from the Federal Reserve.

A poor showing could effectively rule out a QE taper next month and weaken the USD in the process. On the other hand, another impressive economic result may reignite expectations and increase the value of the greenback.  

Written by Jameel Ahmad, Currency Analyst at Blackwell Global

Follow Jameel on twitter @JameelAhmadFX.

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