For once, the dollar traded on the outlook for the U.S. economy and not on risk appetite. While we believe that the rebound in U.S. producer prices and retail sales is not enough to alter the central bank's plans for monetary policy, it could trigger a tinge of optimism from Bernanke, which may be enough to help the dollar hold onto its gains. At the last Federal Reserve meeting, the central bank made it clear that they are in "wait and see" mode, and that everything hinged on the labor market and Europe. Since then, we have seen stronger job growth in the U.S. and have not received any bad news out of Europe. As a result, there's no immediate need for QE3. However one month of improvements is also not enough to change the Federal Reserve's mind about keeping monetary policy extremely easy for the next 2 to 3 years.
Nonetheless, these improvements could warrant some optimism from Bernanke, or at bare minimum, acknowledgement in his speech Jackson Hole. Originally, many economists and traders believed that Jackson Hole would be the forum at which Bernanke laid the foundation for QE3 in September, but if these improvements in U.S. data continue and Spanish bond yields remain below 7%, the Federal Reserve has very little reason to rush into another round of easing. The possibility of less pessimism could lead in adjustments on QE3 trades, which would be positive for the greenback.
For the first time in four months, retail sales increased, rising 0.8% in the month of July. Spending in June was revised down from -0.5% to -0.7%, but the revision did not offset the upside surprise. Excluding autos and gas, retail sales rose 0.9% last month as Americans spent more on furniture, building materials, electronics and online purchases. The amount of money spent on food and gas stations also increased, but not by as much as spending on home improvement -- which is a healthier outcome for the U.S. economy. Producer prices rose 0.3% in July, up from 0.1% in June. Ex food and energy also increased by 0.4%. Inflationary pressures around the world are beginning to rise, but the increase is happening from a low base, which means that inflation remains muted and poses no immediate threat to monetary policy plans.