Dollar Trade Thinned Ahead of Yellen

Weak readings on US personal spending and inflation underscored the two of the main Fed worries ahead of a Tuesday appearance from Yellen. The dollar was beaten up after the data, especially against GBP but it was holiday-thinned trading. Japanese job and retail data is next. A new video for Premium subscribers on "FX ahead of Yellen, Euro CPI, Tankan & NFP" has been posted.

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US core PCE rose 1.7% y/y in February compared to 1.8% expected. That was accompanied by personal spending one tick above the consensus at 0.2% but the prior reading was revised to +0.1% from +0.5%.

The market reaction was unwavering US dollar weakness. The euro gained 60 pips and cable eventually climbed a full cent to erase nearly half of the six day losing streak that started March 18.

The moves had all the hallmarks of a thin-liquidity squeeze because many markets were closed for Easter Monday. Still, the data highlights two of the weak spots on the Fed's radar – inflation and consumer spending. After the report, the Atlanta Fed downgraded its Q1 GDP tracker to just 0.6% from 1.4%.

That's not enough growth to justify a rate hike and that's something Yellen may re-emphasize in a speech in New York Tuesday. The market has bought dollars over the past week after regional Fed Presidents hinted at hawkish outlooks. Given the latest economic data, Yellen has no reason to shift gears. She was measured in her post-FOMC comments and it's unlikely she would want to change her message.

Commitments of Traders

EUR -66K vs -78K prior JPY +53K vs +46K prior GBP -38K vs -14K prior CHF +4K vs +5K prior AUD +18K vs +13K prior CAD -15K vs -17K prior NZD +1K vs +1K prior

The growing bets on the yen are something that will irk Japanese officials. Later today, Japan releases jobs data for Feb that's expected to show steady unemployment at 3.2%. The report to focus on is retail sales, which are expected down 0.9% m/m after a 0.4% drop the month before.  Japanese leaders are almost at the point where they're out of ideas and early returns on the most-recent round of stimulus have been bleak.