Dollar Tumbles as Soft Data Greets the FOMC Ahead of Rate Decision

  • Euro hits new post-election high near 1.1300 as stops eyed
  • USD drops versus all G-10, breaks under 109.00 against JPY

El-Erian Says Fed to Hike Despite Weaker Economic Data

The dollar tumbled the most since April after a round of below estimate U.S. economic data greeted the resumption of the Federal Reserve’s two-day policy meeting, sending traders and analysts scrambling to recalibrate their interest rate expectations beyond today’s widely-expected quarter percent hike.

The dollar fell sharply and Treasuries surged after a greater-than-expected deceleration in consumer-price inflation, raising concerns about the ‘transitory’ nature of recent weakness in U.S. growth. At the same time, retail sales fell in May by the most since the start of 2016. Dollar selling was brisk after the data as traders rushed to reposition. The yield on the 10-year Treasury fell below 2.12, its lowest since November.

  • The dollar fell versus all of its G-10 peers and was nursing losses of around a half percent after holding slight gains at the start of the trading session. Dollar losses were steepest against commodity FX which had already rallied before the day’s disappointing figures. While the data is not expected to change the outcome of today’s Federal Open Market Committee meeting, it throws into doubt the prospect of a third rate hike in 2017 that the Fed has said is its base case scenario. The odds of a third rate hike for this year dropped below 50% after the morning reports.
  • Consumer-price index fell 0.1% m/m (est. unchanged) following 0.2% rise in prior month
  • Retail sales dropped 0.3% (est. unchanged) after a 0.4% increase in prior month
  • The unexpected weakness in the data complicates the Fed’s rate hike decision, traders said. The soft data prompted a flurry of bets for no rate hike today, an outcome that would lead to carnage given the current market expectations for a hike.
  • EUR/USD rose to its highest in about a week, trading to 1.1296 and closing in on a zone of congestion ahead of the November 9 high at 1.1300. Recent rallies to this area have been stymied by thick option-related offers ahead of that 1.1300 mark, though stop-loss buy orders are positioned above there. Dovish signals from today’s FOMC outcome may see EUR gap above 1.1300 amid sparse liquidity, exposing technical resistance at the September 8 high at 1.1327.
  • USD/JPY fell to a fresh low at 108.95; option-related bids cushioned the drop last week and provided fleeting support before stop-loss sell orders positioned under 109.00 were tripped. The Bank of Japan also meets on policy this week with a decision and press conference due Friday. The BOJ is expected to keep rates and policies on hold given that inflation continues to run far below the Bank’s ‘near 2 percent’ target.
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