USD Supported by Data by Korman Tam

The major currency pairs held steady within range in the Friday session, with the dollar initially stronger against the majors following better than expected US economic data. The greenback pushed higher to 1.4156 versus the euro and 117.68 against the yen, but retreated from technical resistance against the pound sterling.

The data quelled fears that deteriorating housing market conditions would spillover onto the US consumer, resulting in a pullback in consumption. September retails sales outpaced estimates, with the headline reading improving by 0.6%, exceeding calls for a decline to 0.2% from 0.3% in August. The excluding autos figure reversed the 0.4% decline from August, rising by 0.4% in September, edging out forecasts for 0.3% growth. The headline PPI reading revealed higher than expected inflation up 4.4% annually versus 2.2% from the previous reading, and up 1.1% versus a 1.4% decline a month earlier. The core PPI figure, which excludes food and energy, was slightly softer than expected up 0.1% m/m and 2.0% y/y. Meanwhile, the preliminary University of Michigan consumer sentiment survey for October was weaker than anticipated, at 82.0, versus calls for an increase to 84.0 from 83.4 from September.

Fed funds futures are pricing in approximately 32% probability of an October rate cut versus nearly 50% chance of an ease a week earlier. We expect the major currency pairs to continue to trade within range heading into next week. Several key economic reports are slated for release that will provide traders additional clues on the Fed’s monetary policy decision at the end of the month. The data consist of NY Fed manufacturing survey, industrial production, capacity utilization, NAHB housing index, CPI, housing starts, leading economic indicators, and the Philadelphia Fed index. Also expected to impact markets are the Fed’s Beige Book as well as Fed Chairman Bernanke’s speeches.

Traders will try to discern to extent of the US economic slowdown by way of next week’s manufacturing and housing reports, while contrasting the Fed’s need to keep inflation at bay. We look for the greenback to remain slightly supported ahead of next Wednesday’s CPI data, which is expected to increase 0.2% m/m and 2.7% y/y. The core readings are unchanged from the previous month at 0.2% m/m and 2.1% y/y. The combination of last month’s rebound in payrolls and inflation continuing to linger at current levels; we look for the Fed to leave policy unchanged at the end of the month, instead opting to ease at the December 11th meeting.