Dollar Jumps On Data Strength

The US Dollar has seen a firm rebound this week with the Dollar index gaining around 1% off the lows midweek in response to a much better than expected set of US Retail Sales for January. The indicator printed 5.3% in January, more than four times the 1.1% forecast and marking a sharp improvement from the -1% recorded in December. Annually, retail sales were seen rising 7.4% against January 2020.

Stimulus Spending Surge

The surge in spending has been attributed to US citizens spending the stimulus cheques they received as a result of $900 billion package agreed in December 2020, shortly before the end of Trump’s presidency. The positive impact created from the stimulus will no doubt be of use to the democrats as Biden continues to campaign on behalf of the $1.9 trillion stimulus package he is attempting to push through Congress. However, the impact could well prove to be short lived if spending returns to normal in February.

Biden Pushing For Bigger Stimulus

The $900 billion package agreed in December included provisions for $600 direct-stimulus cheques for US citizens. Biden’s new package aims to deliver more than double that amount with $1,400 in direct stimulus cheques. Speaking at a Town Hall event in Milwaukee this week, the president told the audience and reporters that with the help of his broad stimulus package, the US economy would come “roaring back” over 2021.

Bi-Partisan Concerns Over Biden's Stimulus Bill

Despite Biden’s argument, there is a great deal of concern among members of both parties. The sheer size of the bill and the need to fund it is one thing, there are also concerns around the impact the proposed minimum wage-hike would have on small businesses and, additionally, there are concerns that stimulus-driven spending could lead to a surge in spending which might force the Fed’s hand at a time when the broader economy is not properly ready. The expected jump in inflation is one of the key drivers of Dollar upside currently, with some layers anticipating that the Fed might have to remove monetary easing at a quicker than expected rate.

Yellen & Powell Dismiss Inflation Fears

However, despite this view, the Treasury Secretary Janet Yellen (former Fed chairman) and Fed chair Powell have both dismissed these claims. Fed’s Powell has also noted that the Fed will be “patiently accommodative” with any upside spike in inflation, echoing its previous declaration that it will now allow inflation to run a little hot, essentially saying it won’t look to raise rates at a hard level of 2% inflation.

Technical Views

DXY

The Dollar index is once again sitting atop the 90.50 level, trading back up into the upper end of the bearish channel from summer 2020 highs. Price continues to find selling interest on approach of the bear channel top. However, while 90.50 holds, there is still a risk of an upside break targeting 91.74 next. To the downside, 89.36 remains the key support to monitor.

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