Dollar Lower Bound

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Market Drivers January 31, 2019
Dollar on back foot
GE Retail Sales slump
Nikkei 1.06% Dax 1.62%
Oil $54/bbl
Gold $1320/oz.

Europe and Asia:
EUR GE Retail Sales -4.3% vs. -0.6% eyed
EUR GDP 0.2% vs. 0.2%

North America:
CAD GDP 8:30
USD Chicago PMI 9:45

The dollar remained on the back foot in Asian and early European trade and reversal in risk sentiment only added to its woes as USDJPY flirted with breaking the 108.50 barrier before the New York open.

After yesterday’s dovish Fed presser which suggested that the FOMC will remain on pause for the foreseeable future as monetary policymakers waited for financial markets to settle down, the dollar lost a lot of ground across the board with traders now forecasting no hikes for the rest of the year. As we noted yesterday, it’s really the highly unstable political climate rather than a significant deterioration in economic activity that is keeping policymakers on the sideline. With President Trump threatening to do shutdown II, FOMC is giving caution the benefit of doubt and will remain neutral as a defensive measure against further exogenous shocks.

Although the buck was weaker as result of Fed’s shift in policy, the EURUSD failed to make much progress against it. The pair did make a run through the 1.1500 level, but the rally stalled and reversed after horrid German Retail Sales data which saw a decline of -2.1% on a year over year basis versus a consensus expectation of 1.5% gain. This was the sharpest monthly drop since 2007 and a clear warning that the German consumer is tightening the purse strings even as the overall labor markets are at multi-year lows in unemployment. The pair then receded even further to 1,1470 as risk sentiment flow reversed.

In North America today, risk flows will be the key driver of trade as well. With no major eco reports on the docket traders will look to equities to see if they can hold the rally. The Fed’s dovish stance was greeted warmly by stock traders yesterday with the Dow rising through the 25,000 level, but if stocks can’t hold that figure and news of Washington shows no progress on trade or budget negotiations stock could quickly unwind yesterday’s move and take FX with them dragging USDJPY towards 108.00 as the day progresses.

Boris Schlossberg
Managing Director

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