Dollar Steadies Before CPI Data That May Matter More Than Fed

  • FOMC focus placed on guidance over balance sheet normalization
  • Pound pressured as subdued wage growth points to BOE on hold

El-Erian Says Fed to Hike Despite Weaker Economic Data

The dollar steadied as the prospect of tier-one U.S. data, alongside the Federal Reserve decision, suppressed interest for trading in size.

The market is expecting a 25-basis-point hike by the Federal Open Market Committee and will be looking for guidance over its next steps. Most investors expect policy makers to stick to their view of at least another hike before year end, yet greater focus will be placed on balance sheet communication. Should imminent normalization be highlighted, the dollar could face headwinds as the next rate hike will be pushed further down the curve, unless the Fed clearly underscores that this doesn’t alter its dot plot.

However, the main risk event for the dollar could be seen before the monetary policy decision, as inflation and retail sales data are due. Leveraged and interbank investors look to trade on the headlines as they see price growth developments as main determinants of the greenback’s direction during the next weeks, according to Europe-based traders. Weak CPI prints could see renewed demand for euro-dollar longs, jeopardizing latest highs, they added.

All in all, option traders saw the possibility that Wednesday events will spur greater volatility in dollar crosses as relatively low. Overnight volatility in euro-dollar stayed significantly lower than on days of previous Fed rate hikes. At the same time, the so-called butterfly suggested the odds of the euro trading in a wider range over the next 30-days stood at an one-year low.

  • BBDXY slightly lower as of 10:04 a.m. London time, paring losses of as much as 0.1%
    • The euro was little changed at 1.1209, amid very thin flows, said the traders, who asked not to be identified as they weren’t authorized to speak publicly
    • A hawkish Fed or stronger-than expected U.S. data could finally see EUR/USD closing below its 21-DMA, currently at 1.1210, for the first time since April 17
  • Sterling failed to hang on to early-London trading gains that had cable testing its 55-DMA at 1.2791
    • U.K. labor report suggested the BOE may need to stand pat for a considerable period of time as earnings growth fails to follow inflation higher
    • Cable dropped as much as 0.2% to 1.2726; noise in pound crosses in the cash market is joined by noise over U.K. politics as speculation rises on whether May will succumb to pressure and pursue a very different kind of Brexit than the one she had in mind before the election
  • The Australian dollar led gains versus the greenback as its Canadian peer rose for a fifth day, on its longest winning steak in three months
    • USD/CAD -0.3% at 1.3205; demand for downside exposure on tenors up to two months was evident another day, with notable strikes being 1.3200 and 1.3000: traders
  • Large expiries rollover Wednesday in EUR/USD at 1.1200-10 (EU2.9b) and at 1.2700 in cable (GBP462m): DTCC
    Before it's here, it's on the Bloomberg Terminal.