Possible rate cut after weak US data

EUR/USD rebounds to near 1.0740 in Tuesday’s New York session. The major currency pair finds buying interest as slower growth in the monthly United States (US) Retail Sales data for May weighs on the US Dollar (USD). The US Census Bureau reported that Retail Sales data – a key measure of household spending – grew at a slower pace of 0.1% from expectations of 0.2%. In April, Retail sales were flat. 

A lower-than-expected rise in the Retail Sales data was expected to build substantial pressure on the US Dollar as it will boost investors' confidence that the progress in the disinflation process will continue. Currently, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, surrenders its entire intraday gains and falls to near 105.30. Weak Retail Sales data would also prompt market expectations for the Federal Reserve (Fed) to reduce interest rates twice this year. 

The CME FedWatch tool shows higher probabilities that interest rates will start declining from the September meeting, with more rate cuts in November or December. On the contrary, upbeat Retail Sales data will strengthen the US Dollar’s appeal and force traders to pare bets that support rate cuts for September.  

Meanwhile, Fed policymakers hold their argument that there will be only one interest rate cut this year. Officials have acknowledged that the progress in inflation declining to the desired rate of 2% has resumed after the Consumer Price Index (CPI) report for May showed that price pressures cooled down more than expected. Though the soft CPI report was a relief for policymakers, they wanted to see inflation declining for months before the commencement of the policy-normalization process. 

On Monday, Philadelphia Fed Bank President Patrick Harker supported keeping rates at their current levels for now to maintain downward pressure on inflation in various sectors such as housing and services, notably auto insurance and repairs. When asked about the interest rate outlook, Harker sees one cut in benchmark rate this year if his economic forecast plays out, Reuters reported.