As indicated by the latest data published in the United States regarding the retail sales report, May brought a significant positive surprise, which occurred even before the start of the World Cup, which usually has a positive impact on consumption. The American consumer is proving that they are unfazed by the prospect of increased hawkish monetary policy, which triggered an immediate reaction in the financial markets.

Key Data:

• Headline: Retail sales in May rose by 0.9% m/m, coming in clearly above the market consensus of +0.5%
• Control group: The indicator that directly feeds into US GDP calculations (excluding items such as autos and fuel) rose by 0.7% m/m versus the expected +0.4%.
• Excluding transportation: Sales excluding autos jumped by 0.8% m/m (forecast: +0.5%).
• Revision: The previous reading for April was revised minimally downwards from +0.5% to +0.4%.
• Year-on-year (y/y): Compared to May of last year, retail sales rose by as much as 6.9%.

Commentary on the data: Strong consumer, Fed, and geopolitics fuel the dollar again

The American consumer does not intend to slow down. The May report is an unambiguous display of the strength of American domestic demand. Previous fears that higher inflation would start to realistically squeeze Americans’ wallets have been put on the back burner for a moment. Most importantly, such a strong result for the control group (+0.7%) proves that the increases are not just an illusion caused by higher prices at gas stations, but reflect real and healthy purchasing activity. Bank of America, based on internal data from its clients’ payment cards, accurately predicted this growth, and indeed consumers went shopping. The dollar is flexing its muscles before the FOMC decision. Such sensational economic data is direct and powerful fuel for the dollar (USD). The publication comes at a key moment, just before the upcoming FOMC decision on interest rates.

The market received a clear signal immediately: since the economy is doing well and the consumer is great, the Federal Reserve has absolutely no reason to rush into lowering interest rates. Today, the market priced in an increased probability of hikes in December at over 80%. However, the key question concerns the tone that the new Fed chair, Kevin Warsh, will serve us. The shadow of Iran and Trump’s threats. The dollar’s strength, however, does not result solely from a purely strong economy and solid GDP fundamentals.

The second, extremely important factor supporting the USD is the geopolitical risk premium returning to the markets. The atmosphere around the Iran deal is being heated up by the latest statements from Donald Trump, who has again begun to openly threaten military attacks and the termination of existing agreements. In the face of such deep uncertainty in the Middle East, investors around the world are fleeing to safe havens, where the dollar remains the undisputed leader. The combination of excellent macroeconomic data and geopolitical anxiety creates ideal conditions for further gains for the USD in the coming days.

​​​​​​​​​​​​​​EURUSD is returning below the 1.16 level before the Fed decision and in light of increased geopolitical risk. Source: xStation5.

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