Treasuries Call the Tune in FX

Weekly Highlights
- * CPI-higher rates ignited a rally in the Dollar Index that stalled and faded.
- * The euro rose to hit a high not seen since the end of February and finished the week with strong momentum.
- * China reports April retail sales, industrial production, fixed-asset investment this week where the data is projected to be robust even if not accelerating. The CNY6.40 area is the next significant chart area.
The higher than expected US CPI spurred a jump in rates and the greenback, but it proved to be little more than a bull trap. The dollar’s upside momentum faded even before the large miss on retail sales ahead of the weekend. Yes, if one averages some recent data and squint in just the right way, the reports don’t look so bad, but the point is not so much about fine-tuning Q2 GDP estimates, which are easing from still strong levels.
Rather, the key questions are whether it moves the Fed’s needle or encourages the market to do the Fed’s heavy lifting. And both are being answered in the negative. Without higher US rates, both relative to other countries and in absolute terms, it is difficult in this context to see the dollar mounting a strong and sustained bounce. Moreover, the miss on both jobs and consumption suggests that Chair Powell’s consensus is not likely to unravel at next month’s meeting. More will come around to the view that the Jackson Hole Fed confab and the September FOMC meeting are the next windows of opportunity for a policy adjustment.
Ironically if high-frequency data are not likely to sway the Fed for another quarter, and if the bond vigilantes adhere to the maxim about not fighting the Fed, technical factors may have greater sway in the foreign exchange market. It is with that in mind that we turn to our weekly look at the price action.
Marc Chandler
Managing Director
Bannockburn Global Forex
www.bannockburnglobal.com