Possibility of Fed’s mid-year rate hike weakens

U.S. retail sales fell in February to -0.6 percent, against expectation of a rise of 0.3 percent, the Commerce Department said on Thursday. Analysts said that snowy and cold weather conditions kept consumers away from showrooms and retail outlets, hampering the first-quarter growth outlook and the mid-year rate hike by the U.S. Federal Reserve.

"Consumers may have throttled back spending, but they maintain the ability and means to spend," said Jack Kleinhenz, chief economist at the National Retail Federation. "With the onset of warmer, spring-like temperatures and an earlier Easter, consumers will likely shake off the winter chills."

In a separate report, U.S. initial jobless claims for state unemployment benefits fell to a seasonally adjusted 289,000 for the week ended March 7, significantly below analysts' expectation of 306,000, the Department of Labor said on Thursday.

The retail report "doesn't change our view that the economic recovery is strengthening,'' said Paul Ashworth, chief U.S. economist at Capital Economics."With the labor market on fire, we suspect that incomes, and eventually consumption, too, will continue to grow at a healthy pace.''

Markets expected the Federal Reserve to raise interest rates in June this year and also to drop the term "patient" from its statement at next week's two-day meeting. However, economists now think the central bank may want to wait longer owing to the slowing economic activity.

"This report points to a surprisingly bigger weather impact on spending activity than previously thought. The weakness in spending could potentially complicate the case for a mid-year hike by the hawkish members of the Fed," said Millan Mulraine, deputy chief economist at TD Securities in the New York.

The U.S. dollar was pressurised by the slump in retail sales figures and it reversed its gains after earlier hitting a 12-year high against the euro. EUR/USD now trades at 1.0609, rising from a 12-year trough of 1.0494.  However, bias remains with bears and the pair is likely to fall over 2 percent this week. The pair was slightly boosted by a bounce in some euro zone government bond yields, which slumped to record lows this week as the ECB started its quantitative easing program. Resistance is seen at 1.0700 levels and support at 1.0494 levels. With no major economic indicators due on Friday, the dollar is likely to continue to strengthen a little further.

"Momentum in the USD rally eased yesterday and EUR/USD bounced, probably driven by some profit-taking following the past days' rapid decline", said Morten Helt, Senior Analyst at Danske Bank. "However, we expect any bounce in EUR/USD to be short-lived and look for further downside in the cross in the coming months ahead of a possible rate hike in June. We have been forecasting EUR/USD to fall in H1 and to bounce in H2. That is still our base case and as such we think that the USD should strengthen further 'now rather than later'".