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The Dollar retreated after U.S. retail sales and industrial production numbers printed at levels that were weaker than expected.

A battered Pound to Dollar exchange rate recovered to 1.2584 after it was reported by the Census Bureau that total retail sales dropped by 0.8% m/m, coming in below expectations of a 0.2% drop.

The control group of retail sales, which is included in GDP, contracted by 0.4% m/m, compared to expectations of 0.2% gain. "Yields and the dollar dropped today as they took in the large negative shock to retail sales," says Ali Jaffery, an economist at CIBC Capital Markets.

The Dollar was lower right across the board as investors unwound some of the year's strong performance in the currency. It is therefore too soon to suggest these data would be the trigger that halts the rally. Jaffery says the Federal Reserve "will not be stressed about a modest and well overdue pullback in retail sales", particularly as it "has been mostly silent about the underlying strength of the consumer."

The Dollar has risen during 2024 as markets push back expectations for the number of rate cuts to fall in 2024 owing to a run of consensus-beating economics data releases. These retail numbers prove an exception to that solid run.

"The US dollar was already lower on the session and then fell further in response to the mixed data releases from the US, with retail sales looking particularly weak. But I reckon it is far too early to talk about the top for the dollar," says Fawad Razaqzada, an analyst at City Index.

Lawrence Werther, an analyst at Daiwa Capital Markets America, says the retail sales result should be interpreted cautiously as inclement weather may have constrained activity to a degree.

"An unimpressive performance from retail activity in January, but we would hesitate from drawing broad conclusions about consumer spending in Q1 from this report," he says.

Elsewhere, industrial production was down 0.1% in January, a deeper decline than the 0.3% growth the market anticipated. The decline in industrial output was driven by a 0.5% drop in manufacturing output, which accounts for about three-quarters of U.S. industrial production.

"The stall speed of industrial sector activity that characterised 2023 continued in January," says Shannon Seery Grein, an economist at Wells Fargo. "Manufacturing activity continues to be constrained by economic uncertainty and higher financing costs crimping capex investment."

"Like everyone else, manufacturers are waiting for lower rates, she adds.

"The dollar’s slight weakness over the past couple of days has coincided with market pricing of rate cuts in 2024 rising back to around 100 basis points after falling to 90 bps following the hot CPI data. But with talks of an early rate cut in March effectively over and lots of questions marks over a May rate cut, this should help keep the dollar supported on the dips," says Razaqzada.