Inflation expectations jump.

US retail sales declined 1.0% for March compared with expectations of a 0.4% decline while there was a slight upward revision for the February data to a decline of 0.2%. Underlying sales declined 0.8% after being unchanged the previous month while the control group declined 0.3%.

The University of Michigan consumer confidence index improved to 63.5 for April from 62.0 previously and slightly above consensus forecasts with net increases in the current situation and expectations components. The 1-year inflations expectations index jumped to 4.6% from 3.6% the previous month despite a decline in headline inflation data while the 5-year index held at 2.9%.

The inflation expectations data hardened expectations that the Federal Reserve would have to raise interest rates again at the May policy meeting.

Fed Governor Waller stated that recent data shows that the Fed hasn’t made much progress on inflation and more interest rate hikes are needed. He added that monetary policy will need to remain tight for a substantial period and longer than markets expect with the extent of further increases depending on the data. He did, however, add that he didn’t think that rate hikes will need to be quite as high as in February.

The dollar was looking for a limited correction ahead of Friday’s US data and there was a sharper move after the data on inflation expectations and Waller’s comments with an aggressive round of short covering.

The latest CFTC data recorded a further decline in Sterling shorts to below 2,500 contracts in the latest week from near 5,000 previously and the smallest short position for over 13 months.

The latest New York manufacturing survey will be released on Monday.  The survey will be important given the recent weakness in the manufacturing sector and the last four months also recorded contraction.

The Euro was hit by a correction on Friday. The dollar also recovered ground during Friday, especially after the inflation expectations data. EUR/USD dipped below the 1.1000 level with lows close to 1.0970 and settled below 1.1000 on Friday.

Higher US yields were important in undermining the yen. USD/JPY posted strong gains to highs around 133.85 on Friday and edged above 134.00 on Monday.

Swiss National Bank Chair Jordan reiterated that monetary policy may have to be tightened further. EUR/CHF edged higher to 0.9840 with USD/CHF recovering to near 0.8950.

Sterling was hit by a sharp correction, especially with less confident risk conditions. GBP/USD dipped sharply to lows at 1.2400 before stabilising.

Commodity currencies came under strong pressure on Friday as the US dollar dipped sharply and equities dipped. AUD/USD dipped sharply to the 0.6700 level before edging just above this level to 0.6725 on Monday. USD/CAD rallied to near 1.3400 before settling around 1.3360.

Economic Calendar