Steady buying in the dollar today
The market is having second thoughts about the Fed.
The initial reaction to the May retail sales report was modest but the continued strength in the US dollar today highlights the fine line the Fed will need to walk.
The FOMC has highlighted data dependency for years but now there is a push to cut rates. The problem is that the data is good. Retail sales beat estimates and the prior two reports were revised significantly higher. On economic data alone, there is no case to cut rates.
At the same time, the Fed is clearly focused elsewhere. They're worried about soft inflation globally and the trade war. The problem is that Powell is going to have a hard time communicating. They will say the economy is solid but warn that they will cut if tensions escalate.
So how do you price that? The market was pricing in an 89% chance of a cut in July before today's data. That's too high, especially when it's combined with the likelihood of two-and-a-half cuts before year end.
I think worries about a less-dovish Fed will persist until at least Wednesday and that should keep a bid under the dollar.
