Skylar Montgomery Koning, a foreign exchange strategist at Barclays, said the dollar was about to rebound as traders overestimated the extent of the Federal Reserve's interest rate cuts and underestimated retail sales data released on Tuesday.
She predicted that stronger-than-expected retail sales would shift market bets toward a smaller rate cut, boosting the dollar. With just two days until the Fed's rate decision, traders are more uncertain about the decision than at any time since 2007, and the consumer report is one of the last pieces of information before the rate announcement.
“We expect the data to be stronger than consensus, and we had very strong retail sales last month,” Montgomery Koning said in an interview. “That could make the Fed lean toward a 25 basis point cut.”
She predicted that the Bloomberg Dollar Spot Index could rise 1% on the news, with most of the gains coming from the euro.
The market has been balancing the possibility of a 25 basis point rate cut and a 50 basis point rate cut by the Federal Reserve in September, and often reacts to new economic data. Investors also expect Fed Chairman Jerome Powell to provide guidance when he announces the interest rate decision on Thursday and update the Fed's economic forecasts.
The dollar index fell as much as 0.4% on Monday, hitting its lowest level since January. The euro rose about 0.4% on the day, while the pound outperformed other currencies in developed economies, rising 0.6%.
Barclays expects the Federal Reserve to make three 25 basis point rate cuts this year as the U.S. economy remains strong.
Economists generally expect retail sales to fall last month amid weak auto sales. If that persists, it would support the view that a recent slowdown in the labor market is translating into more caution among consumers.
However, Montgomery Koning said the market could easily overreact to expectations of rate cuts. She said:
“In those soft landing periods, if you look at historical data, the market has always overestimated how much the Fed would cut rates, and when there was a turning point in expectations, the dollar would rally.”
Article forwarded from: Jinshi Data
