Dollar Pares Weekly Drop as Market Acknowledges FOMC Optimism

  • Euro’s failure to rise above $1.13 sees longs trimmed further
  • Pound drops a second day as retail sales slide before BOE

Fed Chair Janet Yellen's Press Conference in Two Minutes

The Bloomberg Dollar Spot Index rose for the first time this week as euro-longs kept bailing out and the pound came under pressure before the Bank of England’s policy decision.

Investors reduced dollar shorts across the board as they looked to come to terms with a misalignment between market expectations and optimism by the Federal Reserve, according to traders in Europe. Even as Fed officials have been proved wrong a number of times on their rate-hike cycle projections over the past years, by reiterating the four-more-hikes mantra by the end of 2018, compared with fewer than two as current market pricing suggests, they’ve spurred further caution among dollar bears.

While it remains to be seen whether the latest weak U.S. inflation prints prove to be just as transitory as the Fed thinks, the euro dropped as much as 0.5 percent to $1.1164 in London. A close below its 21-daily moving average, currently $1.1212, for the first time in two months may spur further selling interest. Interest to add fresh shorts gained traction on the break of $1.1185 support, said the traders, who asked not to be identified as they weren’t authorized to speak publicly.

The Fed decision and communique did little for long vega trades, with one-month implied volatility in euro-dollar dropping to its lowest level in almost three years. Global currency volatility approaches the record lows seen during the summer of 2014 and with major central banks on hold, it may take a black swan event to unfold for it to rebound convincingly.

  • The dollar gains versus all its G-10 peers except the Australian dollar, with BBDXY up 0.3%, halting a three-day drop
  • The pound was down a second day; it dropped as much as 0.5% to 1.2691 following the release of weaker-than-expected May retail sales, in another sign of consumers feeling the pressure from higher inflation
    • The BOE meeting isn’t seen as a game changer, with very few expectations on it as U.K. elections have clouded the short-term picture
    • Forbes votes for the last time and should she decide not to dissent over steady rates, cable might see further pressure down to 1.2636, the low on June 9
  • One-week volatility in EUR/NOK stands out as tenor now captures Norges Bank meeting due June 22
    • Gauge gains 116bps to hit 7.30% as the pair gains 0.3% in the spot market to halt a five-day decline
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