Dollar retreats despite strong US economic activity data

Despite encouraging economic activity data, the US Dollar has retreated from its daily highs. The dollar has been weakened by a supportive market environment and a risk-on flow.

The US Treasury yields are close to their highest levels in two weeks, limiting the potential downside. The Federal Reserve has raised the chances of a rate hike in December to 42%.

The DXY Index, which measures the dollar against a basket of currencies, has risen to 106.52 before falling back to 106.15 following the release of the September retail sales and industrial production data from the US.

Both reports were above expectations, but the market is currently dominated by risk-on flows, which is preventing the greenback from gaining traction. However, rising US Treasury yields and increasing hawkish expectations on the part of the Federal Reserve may limit the dollar’s downside.

The US economy is still powering ahead, despite the Federal Reserve’s aggressive manoeuvring, and inflation data showed that the consumer price index (CPI) accelerated slightly in September. As Fed Chairman Jerome Powell said at the press conference following the September decision, the Federal Reserve is still prepared to hike again as long as data supports another hike, so the current environment is prompting investors to brace for one more hike in 2023 at the earliest.

The DXY reached a peak of 106.52 before settling at 106.15, retracing some of its gains from the previous day. US retail Sales increased by 0.7% month-on-month (MoM) in September, beating expectations of 0.3%. However, the increase was slower than the 0.8% recorded in the prior month.

In the same month, industrial Production increased by 0.3%. This was also above expectations of 0.0%.

US yields continued to rise, with the 2, 5, and 10-year interest rates increasing by more than 1.5% each. The average 10-year rate increased by 4.84%, 4.83%, and 4.83%, respectively.

CME FedWatch tool has raised the likelihood of a 25-basis-point hike to almost 42%. The Fed’s Beige Book is expected to be published on Wednesday, providing further insight into the near future of the state of the US economy.