Dollar Tumbles to 10-Month Low as CPI, Retail Sales Fall Short

  • Fed rate-hike chances by year-end decline to about 40%
  • Broad greenback slide sees losses vs all G-10 and most EMFX

State Street's Graf Says Markets Really Doubt the Fed

The dollar sank to a fresh 10-month low after closely watched gauges of U.S. inflation and retail sales missed estimates, casting a cloud over the outlook for monetary policy just days after testimony from Federal Reserve Chair Janet Yellen.

The U.S. currency declined versus its G-10 peers and was lower by almost 0.7 percent, its steepest drop since June as measured by the Bloomberg Dollar index. Amid broad greenback weakness, the Australian dollar rose to a 15-month high above 0.7800 and the pound reached its strongest in almost 10 months, approaching 1.3100.

  • The odds of a Fed hike by year-end dropped to around 40% Friday, after Yellen testimony this week that the funds rate wouldn’t have to rise much to reach its neutral level. The FOMC meets July 25 and 26 and is expected to remain on hold after raising rates in June. Next week will also see the start of monthly housing data.
  • Dollar losses were broad and brisk after the data were released, with the USD relinquishing gains vs some peers to trade lower across the board; USD/JPY fell toward 112.00 while the euro approached its high set earlier this week vs USD.
  • EUR/USD +0.6% at 1.1468, near session high and closing in on Tuesday’s 1.1489 peak after option-related offers were absorbed at 1.1450. Further offers are positioned ahead of 1.1500 and stop-loss buy orders are above there, according to traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly. A break above 1.1500 may see EUR gains toward the 2016 high at 1.1616 if expectations of eventual ECB QE tapering remain intact, placing focus on next week’s policy meeting Draghi’s press conference.
  • USD/JPY touched 112.27, its lowest since July 3, as Treasury yields fell, with the yield on the 10-year dropping as low as 2.28%. USD/JPY extended its retreat from the overnight high at 113.58 seen before offers capped the pair. Key psychological support is at 112.00, while technical support is seen just below there where the 55/100 and 200-DMAs converge.
  • GBP/USD was trading close to session high at 1.3093 set in recent trading; GBP easily absorbed hedge-fund offers layered to 1.3030 and appeared to trip stop-loss buy orders as it climbed above its 2017 high at 1.3048, according to traders in Europe and London. The likely close above 1.3000 may trigger a fresh round of model-driven demand later in the day or next week, one London-based trader said.
  • CAD and AUD both rose to highest in more than a year. AUD reached 0.7829, its highest since April 2016, while the USD also lost ground vs a majority of EMFX peers as the drop in Treasury yields bolstered appetite for riskier currencies.
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