USD: Positive employment report keeps Fed on track to normalize policy

A strong increase in retail sales next week (Thursday) is likely to allay Fed and market concerns about the US consumer. This information is expected to support the recent USD rally since the middle of May, adding to the upbeat assessment provided by the employment report on Friday. 

The strong increase in payrolls and hourly earnings suggests that the labor market continues to tighten and that the soft patch in Q1 was transitory. 

A rebound in consumer spending would round out the improvement seen in other economic indicators in Q2. 

Barclays notes:

• We continue to believe that the Fed will hike in September and that market pricing remains too low (14bp hike priced). This should support the USD broadly. 
  
  
• This week, we expect solid retail sales growth in May on a strong labor market and higher disposable income due to low gasoline prices. 
  
  
• We expect a monthly increase of 1.4% in the headline (consensus: +0.9%) and 0.4% (in line with consensus) for core sales after disappointing figures in recent months, where retail sales have remained practically unchanged during the first four months of the year. 
  
  
• Finally, on Friday, we will get PPI figures for which we expect an increase of 0.3% m/m (consensus: 0.4%).