Has Dollar Topped for Now?

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Market Drivers May 14, 2018
Start of the week sees dollars selling
Villeroy hike in quarters not years
Nikkei 0.47% Dax -0.16%
Oil $70/bbl
Gold $1321/oz.
Bitcoin $8420

Europe and Asia:
No Data

North America:
No Data

The dollar was slightly lower across the board in a quiet start of the week trading as EURUSD nudged towards the 1.1900 level while cable pushed towards 1.3600.

There is no data on the economic calendar today, so trading was muted and driven primarily by fixed income and positioning flows. Last week’s tepid US CPI readings and the weak NFP readings the week before that have cooled traders expectations of Fed rate hikes going forward with the market essentially pricing in the prospect of only 3 hikes this year.

Fed officials, however, continue to assume a hawkish stance with Cleveland President Mester reaffirming the view that inflation may go above the 2% range. So far the Fed analysis has been far too optimistic core CPI readings did push through the 2% ceiling last month – but only just – marking only the second time this year that the core readings have risen above the 2% level.

Part of the reason for muted inflation readings is the woefully slow gains in average hourly earnings. Given the tax cut, the stimulatory aspect of fiscal policy and the relative tightness of the labor market, economists expected nominal wages to rise between 3.5%-4.0% by now, yet the gains have only been 2.6% creating very little real wage growth for the US consumer.

Tomorrow’s US Retail Sales will provide the most important view into the state of US final demand. The market is anticipating a rebound in US Retail Sales of 0.5% from 0.2% the month prior, but the number misses its mark once again and shows a paltry growth of 0.2% or worse, the Fed futures market will start to pare its bets regardless of what the Fed officials will say as evidence will continue to mount that case for further tightening is simply not there.

Meanwhile, on the side of the lake, hawkish words from Bank of France Governor Francois Villeroy put the bid in the EURUSD today. Mr. Villeroy reaffirmed that the ECB is moving towards taper in September, but more importantly noted that a rate hike is a matter of “quarters not years” prompting European yields to soar. EURUSD wasn’t able to clear the 1.1900 in early London dealing but it inched up on the rhetoric. The pair looks to have stabilized ahead of the 1.1800 level last week and is now carving out some near-term support.

After such a strong selloff some short covering is due and if the pair can crack the 1.1900 figure it could quickly push towards 1.2000 as late longs will feel trapped. The pair has sold off on the wide disparity between monetary policy expectations between ECB and the Fed but as those views become realigned this week, some rebalancing could be due.

Boris Schlossberg
Managing Director

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