FX Update: USDJPY pulling into important levels.

US September Retail Sales and October Preliminary University of Michigan sentiment up today. The US Retail Sales remains in an interesting data series to watch after the crazy surges and retreats of last year and early this year on the series of stimulus checks issued by the US government. We should be mostly clear of that effect, but the “stimulus cliff” means that rising Retail Sales require a confident consumer that is willing to spend out of savings as well as income in the near term. Consensus is looking for a modest month-on-month drop of –0.2% at the headline and +0.4% ex Auto and Gas after the very strong +2.0% gain in the latter in August.

Also worth watching, more than in many years, is the University of Michigan sentiment index, which has stumbled badly in recent months and actually posted a worse reading in August than during the worst initial phase of the pandemic outbreak before bouncing very slightly in September. Is this on popular concerns about rising prices or ongoing covid irritations and even disruptions caused by supply shortages and even vaccine mandates or all of the above? The initial October reading today is expected near unchanged, and possibly most compelling to watch is whether the 5-10 year inflation expectations in the survey are becoming unanchored. In September, this survey rose back to the decade high at 3.0% at the median, while the “average” 5-10 year inflation expectations are at multi-decade highs, save for a brief period in 2008 when oil prices were ramping above 100 dollars/barrel for the first time.

Sterling shakes off BoE dovish push-back. Sterling was unable to fully participate in the full court press against the US dollar late yesterday. While key resistance in GBPUSD above 1.3670 did give way and the pair traded all the way to 1.3734 yesterday, the gains were capped and the pair closed weakly back below 1.3700. Similarly, EURGBP traded to new local lows and down toward the post-Brexit low of 0.8450, but rallied back into the range late yesterday – an interesting sign of weakness despite the supportive backdrop of strong risk sentiment. The culprit was two Bank of England officials (Mann and the very dovish Tenreyro) out late yesterday suggesting that talk of an imminent rate hike is premature, reversing some of the recent rise in short UK rates. The sterling softness has been quickly neutralized today as UK short yields have steadied and on the backdrop of strong risk sentiment, which is probably the most important driver for GBP here anyway.

Table: FX Board of G10 and CNH trend evolution and strength
The negative JPY trend has reached a remarkable extreme into a Friday – next week to provide more two-way action as 115 in USDJPY approaches?

Table: FX Board Trend Scoreboard for individual pairs
Will watch whether flip to negative USD trend in many places holds into early next week – also note the extreme reading for some of the JPY crosses, at 11+ in some cases.

Upcoming Economic Calendar Highlights (all times GMT)

• 1230 – US Oct. Empire Manufacturing
• 1230 – US Sep. Retail Sales
• 1230 – US Sep. Import Price Index
• 1400 – US Preliminary Oct. University of Michigan Sentiment/Inflation expectations
• 1545 – US Fed’s Bullard (non-voter) to speak
• 1620 – US Fed’s Williams (voter) to speak