Dollar set for a winning week, UK retail sales to be watched

Early Friday morning, the futures market was mixed as investors continued to evaluate earnings reports and the Federal Reserve's increasingly aggressive stance ahead of UK retail sales numbers and Lagarde's speech.

While the US dollar edged lower in early European trades on Friday, it is still on track for a weekly gain as Federal Reserve officials refuted market expectations for an early end to the Fed's aggressive interest rate hikes intended to combat inflation.

The president of the St. Louis Federal Reserve, James Bullard, said on Thursday that even if monetary policy turns dovish, the Fed would still need to raise interest rates over time. This is because rate hikes this year have only had a limited effect on inflation so far.

The Fed's Bullard also marked that interest rates need to be raised from their current levels of nearly 4% to at least 5% to 5.25% to be able to curb inflation sufficiently. Even though data released this month indicated that US inflation in October slowed more than expected, Bullard noted that this could easily change over the next few months.

It is pertinent to note that Bullard's comments coincide with signals from Fed Chair Jerome Powell that interest rates may peak at higher levels than initially expected, even though markets are still pricing in a relatively smaller 50 basis point hike by the Fed in December.

EUR/USD

The EUR/USD is defending early gains above 1.0350 as we enter the European session of the day. As investors assess hawkish Fed speak amid China's reopening optimism and a broad-based pullback in the Dollar, the pair finds support amid a decline in Treasury yields and a pullback in the US Dollar.

In the short term, EUR/USD is restrained by a two-week ascending support line near 1.0350. Euro sellers were hopeful that the pair would fail to cross the 200-DMA hurdle surrounding 1.0415 despite multiple attempts during the week.

There is no doubt that the EUR/USD bears were also helped the previous day by a downward revision to the Eurozone inflation data, as per the Harmonised Index of Consumer Prices (HICP), from 9.9% in September to 10.6% (final) in October against initial forecasts of 10.7%, which also favoured the EUR/USD bears.

Nevertheless, a speech from ECB President Lagarde is expected to be crucial for the short-term movement of the EUR/USD pair, as it loses its momentum on the upside. Despite that, Lagarde's hawkish comments, as well as weaker US Existing Home Sales for October, are not going to deter the bulls from contending on the upside.

European markets

Having recovered from the lows of the day in the US, it is expected that markets here in Europe will open modestly higher. This will be due to the focus remaining on the UK economy as we await data on October retail sales, which are expected to be published later today. While 10-year Treasury yields bounced back from six-week lows before mostly remaining unchanged at 3.77% on Friday, the S&P 500 Futures remain indecisive for the remainder of the week.

The pressure on the UK consumer as we approach the end of the year is unlikely to lessen, although we may well see a pickup in retail sales spending in the run-up to Christmas as we move closer to the holiday season.

Considering that consumer confidence is already at or close to record lows, if there is any money to spend, consumers are likely to hold back before the end of the year and the holiday season.

We are now waiting for the release of the UK monthly Retail Sales figures, which are expected to provide a fresh move into the market. In addition to this, scheduled speeches by the two external members of the Bank of England's Monetary Policy Committee, Catherine Mann and Jonathan Haskel, may have an impact on the Sterling.

In the early North American trading session on Friday, traders will also take a look at the new home sales data from the US. There will be an increase in USD demand on the last day of the week as a result of these sentiments, along with US bond yields on the last day of the week, allowing traders to take advantage of short-term opportunities around the GBP/USD pair.