US retail sales show a declining public interest in spending amid rising interest rates and rampant layoffs. As a result, the US dollar exchange rate fell.

The US dollar index (DXY) slumped to a nine-month record low of around 101.52 in trading on Wednesday (18/January). The greenback was pressured by the release of a series of very disappointing US economic reports in the New York session, as well as the policy direction of several other central banks, which may be more hawkish.

US recession

 

Consumption & Production Slumped, Layoffs Rise

US retail sales posted a sharp fall of -1.1% (Month-over-Month) in December 2022. November period data was also revised from -0.6% to -1.0%. Everything indicates that public spending interest has declined amidst interest rate hikes over the past year.

Subsequent reports were no less disappointing. Producer inflation (PPI) was recorded at -0.5% (Month-over-Month), far below the consensus estimate pegged at -0.1%. Manufacturing production data fell by -1.3% (Month-over-Month) in the same time frame.

US industrial production data also fell for the third time at the end of last year. The data recorded a decrease of -0.7% (Month-over-Month) in December 2022, whereas consensus expects a limited improvement from -0.6% to -0.1%.

"Coming after the retail sales report (the industrial production data) reinforces the message that a recession is approaching, and we may even be in it," said James Knightley, chief international economist at ING, "Keep an eye on Microsoft's announcement of layoffs of 10,000 employees this morning (nearly 5% of its labor force). Remember that employment is always the last thing to turn around in an (economic) cycle as employment data is a lagging indicator."

 

USD/JPY Fails, GBP/USD Shows Off

The depreciation of the US dollar coincided with the strengthening of some of its major rival currencies. The yen remains supported by market expectations of a more hawkish market, although Japan's central bank continues to try to quell speculation about a change in policy. USD/JPY briefly bounced to a high of 131.58 during the Asian session but then plunged to around 128.30s entering the New York session.

Despite the Eurozone inflation report showing a slight dip, EUR/USD holds its ground within multi-month highs in the 1.0820s band. Most market participants still hope ECB President Christine Lagarde will realize her rhetoric about a 50 basis point interest rate hike next month.

GBP/USD rocketed to a one-month high. The latest UK inflation data slightly declined, but core inflation remained high and exceeded market estimates. Consequently, the market is increasingly convinced that the British central bank (BoE) will raise interest rates by 50 basis points in the near future.

"The modest fall in CPI inflation... and unchanged core inflation... means it is too early for the BoE to declare victory in its battle against inflation," said Ruth Gregory, senior UK economist at Capital Economics. "With baseline inflation, activity and wages growth ending last year slightly stronger than expected, we doubt the BoE will stop raising rates."