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- What could drive the dollar’s next leg higher?
What could drive the dollar's next leg higher?
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Loading...Over the past few weeks, the markets have come to accept the likelihood of a December Fed hike. US interest rates have adjusted. The pricing of the December Fed funds futures contract is consistent with around an 80% chance of a hike.
Where will the fuel come from for the next leg up for the dollar?
With a Fed funds target range of 1.00% to 1.25%, the effective average rate is steady at 1.16%. The anticipated hike in December will likely lift the effective average to 1.41%. That means that a hike in 2018 would lift the effective average to 1.66%. The implied yield of the December 2018 Fed funds contract is 1.64%, suggesting the market remains profoundly skeptical of the three hikes that most Fed officials see as likely to be appropriate next year.
The US data highlight from the week ahead will be the CPI and retail sales reports on October 13. To be sure, the data will not be clean in the sense that some components will be distorted by the storms. The distortion will likely be on the upside. Gasoline prices surged, which will help flatter the headline, but there is more.
The market for products, like household appliances and the like, that are necessities in the storm-ravaged areas, appear relatively tight in terms of inventory/sales ratios.
Investors already know that US auto sales surged in September. This, and the rise in gasoline prices, will lift the headline, possibly by the most in a couple of years. The economic dynamics of what we discussed above will spill over and help accelerate the gains in the measure used for GDP purposes, which excludes, autos, gasoline, building materials.
The economic dynamics of what we discussed above will spill over and help accelerate the gains in the measure used for GDP purposes, which excludes, autos, gasoline, building materials. The average of this core measure of retail sales this year has been a 0.23%, identical to last year's average. The median forecast in the Bloomberg survey is for a 0.4% increase after a 0.2% decline in August.
Source: Bloomberg Pro Terminal
Trader-G.Bozhidarov
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