US Retail Sales are expected to increase further in July, ahead of tariff hikes

• The United States Census Bureau will release Retail Sales data on Friday.
• US Retail Sales are expected to have increased by 0.5% in July, in line with June’s 0.6% rise.
• These figures are unlikely to significantly alter the consensus for a Fed rate cut in September.

The United States Census Bureau will publish the country’s Retail Sales report on Friday. Market analysts anticipate a 0.5% monthly growth in the headline Retail Sales in July, following a slightly higher increase in June, suggesting that consumption stayed strong. Consumers seem to have rushed to Main Street, responding to summer sales and eager to avoid further price hikes from higher trade tariffs. 

Consumer spending unexpectedly rebounded in June following the 0.9% decline in May. Retail and food services grew 0.6%, totalling USD 720.1 billion in June, fuelled by a broad-based recovery. Excluding autos, sales of all other products increased 0.5% compared with the previous month.

The data release will find the Greenback on its back foot. The moderate consumer inflation numbers seen earlier in the week have boosted investors’ confidence that the Federal Reserve will finally cut rates at its next meeting in September, triggering a risk-on mood that is weighing on the US Dollar. 

The USD Index (DXY), which shows the value of the Dollar against a basket of six majors, has depreciated about 2.3% so far in August, reaching lows below the 98.00 mark.

The market is almost fully pricing an interest rate cut in September, and investors will be looking at July’s consumption figures for confirmation. A slight moderation in retail consumption, as expected, might be the “Goldilocks” reading that highlights a somewhat softer consumer spending, but without triggering concerns of a recession. This would allow the central bank to ease its monetary policy to support a softening labour market.

What to expect in the February US Retail Sales report?

The headline Retail Sales is likely to show a 0.5% increase, after June’s 0.6% growth. The core Retail Sales, which exclude the automobile sector, are expected to have shown a somewhat larger moderation, with a 0.3% increment, after the 0.5% advance seen in June.

All in all, July’s Retail Sales report is expected to reflect that US consumption remains resilient, as buyers responded to summer sales, anticipating their purchasing decisions to avoid the impact of tariffs on prices. Automobiles are seen as the main driver for July’s gains for the second consecutive month, but most retail sectors are expected to reveal higher sales from the previous month.

“A bounce in auto sales and higher prices during the [July] month are mostly behind the 'stronger' retail print,” said economists at Wells Fargo ahead of the data release. Still, consumers have shown signs of spending fatigue recently, they said. 

“We suspect the moderating job market and concern over tariff-induced price pressure has led consumers to grow more choosy,” they added.

When will US Retail Sales data be released, and how can it affect EUR/USD?

The US Retail Sales data for July is due at 12:30 GMT. Unless the numbers show a significant deviation from the market consensus, July’s consumption figures are unlikely to stand in the way of a September rate cut by the Federal Reserve, which is nearly fully priced at the moment.

In this context, the data release will fail to provide any significant support to a softening US Dollar, which is expected to remain vulnerable, as hopes of an easier monetary policy will likely fuel investors’ appetite for risk.

The EUR/USD pair has rallied nearly 3% so far in August, as soft US labour data and recent comments from Fed officials have prompted investors to ramp up expectations of Fed rate cuts. The immediate bias is positive, but the pair needs to breach the trendline resistance at 1.1735 to clear the path towards July’s highs at first 1.1785 and then 1.1830.