USDJPY Bears Test 160 as US Retail Miss Reshapes Fed Path
July retail sales missed estimates by 0.7 percentage points, slashing September Fed hike odds to 31%. USDJPY bears pushed away from 160 as hedge funds halved yen shorts.
The US dollar slumped to a two-month low after July retail sales fell 0.6%, missing expectations for a 0.1% rise. The miss, paired with a drop in the University of Michigan consumer sentiment index, pushed September Fed hike odds to 31% and year-end tightening probability to 64%, according to CME FedWatch data.
Goldman Sachs thinks even those numbers are too high. A September rate hike looks unlikely with inflation slowing, employment falling, and retail sales contracting, the bank said. Goldman sees consumer price inflation continuing to decline without Fed intervention.
The main disruptor to that disinflation path, Goldman argued, would be Brent crude breaking out of the $80–90 per barrel range. Israel's attacks on Lebanon raise the risk of that scenario through potential Middle East escalation. If Brent stays inside the consolidation range, US inflation should keep slowing, which would leave the Fed lagging other central banks on tightening and further weaken the dollar.
The dollar's decline let USDJPY bears push the pair away from the key 160 level, reducing the risk of joint US-Japan currency intervention. Since the last intervention, hedge funds have halved their short yen positions.
Speculators look less confident in the USDJPY rally than they were from May through July, traders said. The market has absorbed that Sanae Takaichi's government will not block monetary tightening and that the Bank of Japan may raise rates as soon as September. The probability of a September hike has risen to 80%. Futures markets fully price a tightening in October.
Gold climbed back above $4,400 an ounce on the weak US retail data. For the precious metal, the difference between recession and stagflation is minimal, analysts at Goldman Sachs said. In either case gold tends to rally. If US GDP growth keeps falling, the inflation path matters less, and gold bulls can exploit the dynamics.
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