Dovish FOMC meeting minutes and inflation to keep dollar subdued

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A slow start to the week will see the pace pick up steam as the markets prepare for Tuesday’s inflation data followed by Wednesday’s FOMC meeting minutes from the April Fed meeting.

The US dollar closed Friday on a strong note following the release of the retail sales data. After the release which showed US retail sales rising at the fastest pace in a year at 0.80% excluding autos, the dollar slipped in late Friday trading but still managed to close in the positive. The better than expected retail sales numbers prompted the Atlanta Fed’s GDPNow model to forecast Q2 US GDP at 2.80%. Meanwhile, the NY Fed’s Nowcast saw a more modest increase to 1.20% for the second quarter.

US Q2 GDP Forecasts (Atlanta Fed & NY Fed)
US Q2 GDP Forecasts (Atlanta Fed & NY Fed)

On Monday, the dollar index was seen trading weaker across the board after China’s industrial production and retail sales disappointed. For April, industrial production increased at a slower pace, rising 6.0% down from 6.80% in March and below estimates of 6.50% increase. Retail sales data was also soft, rising 10.10% in April easing off from 10.50% growth seen in March. A modest risk off sentiment saw gold prices seeking early gains while the yen was mostly subdued. Gold prices briefly tested session highs of 1283.98.

On Tuesday, US Consumer Price Index is expected to show a 0.40% increase in April, extending March’s 0.10% increase while on a year over year basis, CPI is expected to rise 1.0%, up from 0.90% previously. Excluding food and energy, CPI is expected to rise 0.40% on the month on month basis while it is forecasted to remain steady at 2.20%, rising at the same pace as in March on a yearly basis.

Following the inflation data, housing starts, building permits will be released which is expected to see a recovery, rising 3.30% and 5.50% respectively in April. US industrial production is also estimated to have increased 0.30% in April after a 0.60% decline in March. Regardless of how good the data may be, the US FOMC meeting minutes will however likely overshadow the data.

At its April meeting, the Fed decided to leave interest rates unchanged. It noted that labor market conditions continued to improve despite a slowdown in economic activity. The Fed acknowledged that strong job gains pointed to the additional strengthening of the labor market and that growth in household spending moderated but sentiment among consumers as still high.

At the April meeting, only one Fed member, Esther L. George voted to rate the Fed funds rate, while the remaining nine members, including Fed Chair Janet Yellen, voted to keep rates unchanged. Given the majority of Fed members voting to keep rates unchanged, the minutes could be dovish, if not more and could keep the dollar pressured lower. A weaker US dollar into tomorrow could see the greenback give up its gains.

The US dollar index is unlikely to budge higher unless the support at 93 is clearly tested ahead of a larger move higher towards 96.0.

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