Dollar gains despite weak US data

The US dollar maintained substantial gains against the euro, yen, and pound early on Wednesday despite weaker-than-expected US economic data. US retail sales unexpectedly fell last month by 0.3%, disappointing prior market expectations for a 0.1% increase. This drop was partly attributed to significantly weaker automobile sales. Excluding those volatile auto sales, core retail sales increased by 0.2%, but also fell short of 0.4% expectations. The US Producer Price Index (PPI), a key inflation indicator, was also released on Wednesday. It, too, came in lower than expected at a -0.1% change in prices for March against prior expectations of a 0.3% increase.

These data points are particularly important with respect to the current focus on central banks, as the Federal Reserve continues to formulate its forward-looking monetary policy based upon key economic information and indicators. Inflation indications, as shown by such data as Wednesday’s PPI and the upcoming Consumer Price Index (CPI) numbers on Thursday, could have a marked effect on the Fed’s near-term decisions to raise interest rates. Economic indicators that reflect the health of the US economy, including the noted retail sales and core retail sales data, also play a role in the Fed’s decision-making, thereby also affecting movement in the US dollar.

As shown on the USD/CHF chart, the dollar has been in a general decline since December, printing consistently lower highs and lower lows. Most recently, the currency pair broke down below the key 0.9650 prior support level, as well as a major uptrend line extending back to May of last year. Early this week, price action hit its downside target at 0.9500 support before bouncing. The decline of the US dollar in the past several months has been largely due to a progressively more dovish Fed, which has lowered expectations for medium-term rate hikes due to global economic problems and weak inflation.

As mentioned, Wednesday’s dollar surge has occurred despite weakness in US economic and inflation data. This surge has pushed USD/CHF back up to the noted prior support level at 0.9650. If this level is able to hold, this time as resistance, a turn back to the downside should once again target the 0.9500 support objective, followed by a potential continuation of the recent downtrend. On any unexpectedly strong breakout above the current 0.9650 resistance, further resistance can be seen around 0.9785, the level of late March’s swing high.