• Double hit
  • Fed hopes derailed?
  • Reverse, reverse!
  • Press conference takes precedence

The dollar took a double hit this morning, with both retail sales and inflation significantly disappointing investors. US retail sales for the month of May recorded the biggest monthly drop since January 2016, down 0.3% vs. analyst expectations of a 0.1% increase. Consumer price inflation hit a 6-month low of 1.9% which was just slightly under consensus expectations of 2%, but the core reading was a little more concerning. Discounting more volatile elements like food and energy prices, annualized core inflation slowed to a two-year low. Discounting shelter, core CPI rose at slowest pace since 2004. On a monthly basis, consumer prices fell 0.1%, chasing up a 0.2 percent rise in April.

These figures are especially concerning heading into the FOMC meeting today. The Fed is all but guaranteed to raise interest rates at the conclusion of their June meeting, but weaker inflation may muddy the outlook for future rate hikes. The decline in core inflation seems to bely the Fed’s assertion that the weakness seen in the first quarter of the year was transitory. We are keeping a keen eye on Fed Chair Janet Yellen’s press conference and on the dot plot. The Federal Reserve’s so-called dot plot tracks FOMC’s members’ outlook of the path of interest rate hikes. It is used to signal the Fed’s policy predictions which in turn helps shape the broader landscape of financial markets. If the FOMC downgrades the outlook for rate rises through the rest of year, we would look for the dollar to weaken in turn.

Could Britain reverse Brexit? Germany’s Finance Minister wants to at least put the offer on the table. In an interview with Bloomberg, Wolfgang Schaeuble extended the proverbial olive branch to London. He said a decision to reverse Brexit would be met with “open doors,” but conversely he also said the move “was not very likely.” After losing a majority hold in Parliament, Prime Minister Theresa May has faced mounting criticism at home and abroad.

Investors are expecting a 25 basis-point rate hike at the FOMC rate decision today at 2pm EST. Yet, as these expectations are already priced in, weaker US data has the dollar precariously poised on the back foot heading into the meeting. We may continue to see a weaker USD heading into the meeting as investors may find the weaker data difficult for the ever-cautious Fed to dismiss. The Fed Chair will likely field questions about this data in her press conference, and if she maintains a stronger economic outlook we could see some dollar upside later this afternoon.

EURUSD: Euro soaring after US retail sales and inflation data missed expectations.

GBPUSD: Despite mounting concerns from the interior, sterling has nudged higher on weaker US data.

AUDUSD: Aussie dollar extending gains from an upbeat retail sales report out of China, riding the wave of a weaker USD.

USDCAD: Canadian dollar stronger as the USD stumbles with weaker-than-expected CPI inflation and retail sales.

USDJPY: Japanese yen was one the biggest gainers following the dollar’s drop this morning as retail sales and inflation missed estimates.