The latest US retail figures, released mid-January, show that sales seemingly lost momentum over the Christmas period, whilst the November reading was also revised downwards. Why is this important for investors?
The US dollar appreciated to a two-decade high in September, as investors sought the safety of the global reserve currency during a period of increased geopolitical uncertainty. This was also at a time when US interest rates were moving swiftly higher, attracting further capital flows. However, the dollar has been reversing course since Q4 of 2022, because US inflation numbers have begun to register more weakly than expected. This has led to forecasts of a slowdown in the world’s largest economy, which, in turn, has lowered expectations for the trajectory of US interest rates and has seen capital flow away from the greenback. In addition, China has ended its long zero-Covid policy, which has been met with a more risk-on mood in markets, and is likely to see further capital flowing away from the safe-haven dollar.
During this period, the US retail figures were released, and we also received UK inflation data for December. This showed Consumer Price Index inflation remaining stubbornly high, despite the sizeable fall in prices at petrol pumps. The contrasting picture between UK and US inflation – and, as a result, interest rate expectations – may further contribute to a stronger pound and a relatively weaker dollar in the short term. This could moderate gains for sterling-denominated gold in the short term, and provide an opportunity for sterling investors to rotate and diversify portfolios as we move into a period of economic uncertainty, which could increase demand for the yellow metal.