US Dollar Longs Look For The Exit

It's not often that the pending home sales report sparks a 40-pip decline in the US dollar but when it happens, it usually says more about the psychology of the market than the data. On the day, the kiwi was the top performer while the Canadian dollar lagged. Japanese retail sales are due later.  Our Premium trades include USDCHF, GBPUSD, AUDUSD  & NZDJPY. A new set will be issued on Tuesday ahead of Wednesday's Fed decision.

US pending home sales rose 1.0% year-over-year compared to 2.2% expected, which is hardly a dramatic miss but the market was clearly rattled as the euro immediately rose to 1.2722 from 1.2680 against the dollar. Similar, albeit smaller, moves came across the board.

We're highly skeptical that the market has a newfound fear about US housing. Rather, the market looks skittish about the Fed staying dovish and US dollar longs may have been looking for a reason to head to the exits.

The Fed focus is on guidance but inflation is a growing concern. 5-year breakevens indicate inflation at just 1.50% through the end of the decade and that's hardly something Yellen can ignore.

In the UK, the market finally got a taste of where the BOE's Shafik stands as she released a dovish interview with the FT. She sees “no significant evidence” of inflation and didn't sound like an MPC member in any hurry to hike.

Looking ahead, the focus shifts to retail sales at 2350 GMT. The consensus is for a 0.8% y/y improvement and the BOJ could be watching closely ahead of the meeting on Oct 31. There is some talk of fresh dovish indications at that meeting and it shouldn't be overshadowed by the Fed.