Dollar Selloff Resumes after Poor CPI and Retail Sales, Vulnerable on FOMC Dovish Hike

Dollar is under some renewed selling pressure in early US session after poor economic data. Headline CPI dropped -0.1% mom, rose 1.9% yoy in May. The annual rate was notably slower than prior month’s 2.2% and missed expectation of 2.0%. Core CPI rose 0.1% mom, 1.7% yoy. The annual rate was also slower than prior month’s and expectation of 1.9% yoy. Headline retail sales dropped -0.3% in May, below expectation of 0.1%. Ex-auto sales dropped -0.3% versus expectation of 0.2%. The weakness against Canadian Dollar is particularly clear as USD/CAD is now clearing 1.3222 key near term support firmly. There is prospect of EUR/USD revisiting 1.1298 key resistance level even before FOMC announcement.

Talking about Fed, it’s widely expected to raise federal funds rate by 25bps to 1.00-1.25% today. The base case for this year "was" that Fed will hike a total of three times, with another one in September, and then start shrinking its balance sheet in December. But there are doubts on whether the economy could withstand that recently. Today’s set of data adds much to such worries. The new economic projections to be released today with the rate announcement are key to market expectations. That includes growth and inflation forecasts (with unemployment forecast a little less important), as well as the so called dot plot interest rate projections. In addition to that, the vote split will be closely watched to see how divided the committee is. Meanwhile, technically, we’d maintain the view that should EUR/USD takes out 1.13 handle decisively, selloff in Dollar will likely accelerate.

Former PM urges May on softer Brexit

In UK, former Prime Minister David Cameron urged Prime Minister Theresa May to "consult more widely with the other parties on how best we can achieve" success in the Brexit negotiation with EU. He noted there "will be pressure for a softer Brexit" and the parliament "deserves a say" on managing the Brexit process. Separately another former Prime Minster John Major said that "the concept of what we crudely call a hard Brexit is becoming increasingly unsustainable." And, "a hard Brexit was not endorsed by the electorate in this particular election." Theresa May said yesterday that the Brexit negotiation will formally start next week as scheduled.

Released from UK, claimant counts rose 7.3k in May, below expectation of 10.0k. ILO unemployment rate was unchanged at 4.6% in April. But average weekly earnings rose 2.1% 3moy, below expectation of 2.4% 3moy.

France and Germany open if UK changes mind

French President Emmanuel Macron said that the "doors remains open" if UK is to change their mind about Brexit. And it’s "always open until the Brexit negotiations come to an end. But he emphasized that its a "a sovereign decision was taken by the British people and that is to come out of the European Union, and I very much respect the decisions taken by the people, be it by the French people or the British people." And, "once the negotiations have started we should be well aware that it’ll be more difficult to move backwards." Comments of Macron echoed those of German Finance Minister Wolfgang Schaeuble that "if they want to change their decision, of course they would find open doors, but I think it’s not very likely."

Released from Eurozone, industrial production rose 0.5% mom in April, employment grew 0.4% qoq in Q1. German CPI was finalized at 1.5% yoy in May.

IMF raised China growth forecasts but urged reforms

The International Monetary Fund raised its growth forecast for China to 6.7% this year, up from 6.6% in April. For the period from 2018 to 2020, IMF now projects China’s growth to be averaged at 6.4% annually. That’s also an upward revision from April forecast of average 6.2%. At the same time, IMF urged China to speed up actions on debt and reforms. The fund’s First Deputy Managing Director David Lipton said in a statement that "while some near-term risks have receded, reform progress needs to accelerate to secure medium-term stability and address the risk that the current trajectory of the economy could eventually lead to a sharp adjustment. And, "it is critical to start now while growth is strong and buffers sufficient to ease the transition."

Released from China, industrial production rose 6.5% yoy in May, fixed assets investments rose 8.6% yoy, retail sales rose 10.7% yoy. Staying Asian Pacific, Japan industrial production was finalized at 4.0% mom in April. Australia Westpac consumer confidence dropped -1.8% in June. New Zealand current account balance turned into NZD 0.24b surplus in Q1.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.3193; (P) 1.3259; (R1) 1.3306; More….

USD/CAD’s decline continues today and reaches as low as 1.3164 so far. The strong break of 1.3222 support as well ass the medium term channel support affirms our bearish view. That is, corrective rise from 1.2460 has already completed at 1.3793. Intraday bias stays on the downside for next key level at 1.2968 (38.2% retracement of 1.2460 to 1.3793 at 1.2969). On the upside, above 1.3245 minor resistance will turn bias neutral and bring consolidations. But upside should be limited by 1.3387 support turned resistance and bring fall resumption.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The first leg has completed at 1.2460. Rise from 1.2460 is seen as the second leg and has completed at 1.3793, ahead of 61.8% retracement of 1.4689 to 1.2460 at 1.3838. Break of 1.3222 should now indicate the start of the third leg while further break of 1.2968 should confirm. In that case, USD/CAD should decline through 1.2460 support to 50% retracement of 0.9406 to 1.4869 at 1.2048.

Economic Indicators Update