USD Falls Back to Two-Month Low Amid Disappointing US Retail Sales

US retail sales fell short of expectations in July, declining by 0.6% against an expected 0.1% rise. This disappointing data has weighed heavily on the dollar, causing it to drop back to a two-month low.

The University of Michigan's consumer sentiment index also declined, further reducing the likelihood of a Federal Reserve rate hike in September to 31%, and by the end of the year to 64%. Goldman Sachs believes these figures are still overestimated, and a federal funds rate hike in September is highly unlikely against a backdrop of slowing inflation, falling employment, and declining retail sales.

Looking ahead, Goldman Sachs predicts that consumer price inflation will continue to fall without any intervention from the Fed. The only factor that might disrupt this disinflationary process is if Brent breaks out of its $80-90 per barrel trading range, which could increase the chances of a US rate hike and strengthen the dollar.

However, if Brent fails to break out of its consolidation range, the chances of a slowdown in US inflation will increase. This would cause the Fed to lag behind other central banks in tightening monetary policy and weaken the dollar further.