The biggest event risk for the US dollar this week will be the April retail sales report. Since hitting a record low against the Euro the middle of last month, the greenback has strengthened significantly. However as the market finally latches onto the recent strength of the dollar, we are actually beginning to see a shift in its trend. Since Thursday, the EUR/USD has already climbed over 250 pips from 1.5280 to 1.5530.

The degree of consumer spending last month will play a major role in determining whether the recovery in the US dollar is over.

Weak Job Growth Does Not Always Equal Weak Retail Sales

The US economy has lost jobs for 4 months in a row , leading everyone to believe that consumer spending will contract. In fact that there are MANY reasons to believe that retail sales decreased in April including the following:

1. Four Consecutive Months of Negative Job Growth
2. US Consumer Confidence Hits a 26 Yr Low (According to the UMich Survey)
3. US House Prices Drop 12.7% in Feb, Foreclosures on the Rise
4. Gas Prices Break Above $4 a Gallon in Many States, Food Prices Increase

*Although higher gas and food prices also boosts the value of consumer spending, it could negatively affect spending volume.

However there are also many reasons to believe that retail sales may not be extraordinarily weak:

1. The International Council of Shopping Centers (ICSC) reported a 3.6 percent increase in chain store sales
2. Strong earnings have been reported by discounters such as Wal-Mart, Costco and Kohl’s.
2. SpendingPulse, the retail data service of MasterCard Advisors reported 0.1 percent rise in spending

According to Ken Perkins of Retail Metrics Inc, April was the best month for retailers since November. I am skeptical about consumer spending because excluding cars and gasoline, consumer consumption should remain weak. However with just as many reasons for retail sales to rise than fall, a contraction in spending may not be a given.

Don’t forget that in October 2001, when non-farm payrolls dropped 325k, retail sales actually jumped 6.6 percent. Retail sales can be very volatile on a month to month basis.

Impact of Retail Sales on the US Dollar

The bigger question for currency traders is whether a surprise in retail sales will matter for the US dollar. With Fed fund futures pricing in an 86 percent probability that interest rates will remain unchanged at the end of June, the market is convinced that the Federal Reserve will shift its focus away from growth and onto inflation by pausing.

Weak consumer spending is also very much discounted by the markets given the recent trend in the US economy, which means that it may not be much a surprise. However exceptionally strong numbers would on both a volume and value level validate the central bank’s decision to take a break from cutting interest rates and would put us closer to the end of the Fed’s easing cycle.