Dollar Sails on Retail Details

The US dollar was the top performer for the second consecutive day while the yen was the laggard. The Asia-Pacific session features Australian wage costs. Today's premium trades weighed the fundamental and technical strengths and weaknesses regarding EURUSD, with 2 trades on the pair as well as daily and weekly charts Both of the longs in EURGBP were filled and in progress. All trades and rationales are in the latest Premium Insights.

Never underestimate the spending power of the US consumer. Overall sales were fractionally below expectations but upward revisions and solid results excluding volatile items gave the dollar a boost. Coming into US trading, USD/JPY was already much higher as the market digested chatter about Japanese corporate tax cuts.

After the retail sales numbers, US dollar strength extended and spread. Bonds were a large factor as 10-year yields jumped 10 basis points to 2.72%. That's perilously close to the cycle high of 2.75%. If that level breaks, it could underpin a larger dollar rally.

Trading action was particularly concentrated in EUR/GBP on Tuesday as a wave of stops below 0.8580 sparked a near-instantaneous drop to 0.8535. The carnage spilled over to EUR/USD, eventually leading to a half-cent decline.

The taper debate continued with Lockhart mostly stressing that the Fed is data-dependent. One interesting comment was that only 'very weak employment' would prevent a wind-down of the program. He also referred to risks of disinflation. Together the comments stress that the market may be misinterpreting the Fed`s internal debate on the taper.

In the hours ahead the market will continue to focus on the stock markets in Japan and China but economic data will also be in the spot light. Up first, at 2245 GMT, New Zealand releases Q2 retail sales data. Expectations are for a whopping 1.5% quarter-over-quarter rise, highlighting the spending power of New Zealanders due to house price rises.

Later, at 0130 GMT, Australia releases the Q2 wage cost index. A 3.0% rise is expected but a higher number could further dim future AUD rate cut hopes.