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Buy regularly in the dollar today
The market has doubts about the Fed.
The initial reaction to the May retail sales report was modest, but the continued strength of the US dollar underscores the flexibility the Fed will need today.
The FOMC has highlighted data dependency for years, but there is now an effort to reduce rates. The problem is that the data is good. Retail sales have exceeded estimates and the two previous reports have been revised considerably higher. Just on economic data, there is no need to reduce rates.
At the same time, the Fed is clearly focusing elsewhere. They are worried about the weakness of global inflation and the trade war. The problem is that Powell will have trouble communicating. They will say that the economy is solid but warn that they will cut off if tensions rise.
So, how do you price? The market envisioned 89% chance of a reduction in July compared to today 's data. This is too high, especially when combined with the probability of two and a half cuts before the end of the year.
I think worries about a less accommodating Fed will persist until at least Wednesday and that this should keep a bid below the dollar.
ForexLive
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