The pushback against the too-strong dollar that we identified last week has come back, and with some muscle. It’s a little strange for the euro, for example, to be on an upswing with some momentum when the consensus has it that the ECB will cut rates in June while the Fed is going to take longer. If the euro boost is a function of the decent IFO, it may be short-lived. To be fair, the 10-year yield may have started to trend down—see the chart in the Chart Package—although that has come back today. The pushback is nearly universal, with only the peso and Chinese yuan not joining the crowd.

It’s wishful thinking to imagine that uncertainty over the core PCE perhaps surprising this time may have something to do with it, although the dip in the flash PMI may support such a view. Instead, the pushback seems to be a function of rising risk embrace plus the rapid yield recovery, and we get some evidence from the drop in gold.

Forecast: The dollar is starting to show enough softness to make you wonder if the expected H2 decline is already starting. The major trend lines still favor the dollar and this is a pullback/pushback so far, but it’s growing legs. If and when the yields retreat, the dollar could well go with them. For what it’s worth, the 20-day moving average in the 10-year yield lies at 4.4870%, or roughly 4.5%, which would be a drop by about 50 bp.

It would take some seriously bad macro data to force that outcome. Meanwhile, we continue to await the PCE data and while we can’t expect the Fed to use anything other than the standard y/y, there are plenty of analyses that fiddle the numbers to get far tamer inflation, and the Fed cannot be blind to that. Ahead of the meeting next week, we have official silence but afterwards, we might start to hear more dovish/less hawkish remarks. That would mean the bells would start tolling for the dollar.

Political Tidbit: We news junkies are enjoying the Trump trial, but you can’t turn to Fox “News” for anything useful—it’s showing a fraction of what the liberal CNN and MSNBC are showing, which is practically wall-to-wall. Reporters inside the courtroom in the overflow room text the latest developments to reporters outside who then report live, to be followed by re-hashing the end-of-day transcript in the evening. 

According to the lib reporting side, Trump is near to a melt-down because he is not in control. The judge is. And the testimony is crystal-clear—the intent of Trump’s decisions was to prevent information about his bad behavior affecting the election outcome. Trump supporters like Fox commentators say dirty tricks are part of the democratic process, all speech is free (not so) and the judge is being hard on Trump when in practice, any other person would have been jailed by now. There is a good possibility Trump’s clearly intentional violation of the gag order will lead to a jail sentence, but not until the trial is over.

Reasons for the Fed to cut rates:

Avoid embarrassment from getting inflation wrong twice.

Normalize the yield curve.

Head off any recessionary tendencies.

Help housing via mortgage rates.

Help banks rollover commercial property loans.

Help the stock market.

(Help the current White House).

PCE Watch: Conventional wisdom has PCE later this week rising a bit to 2.6% annualized on higher energy costs. Core is expected to rise 0.3% m/m, about the same as Feb (Bloomberg).

But as we wrote yesterday, some nay-sayers are out in force. The FT, Yardeni and Truflation all indicate that if you modify the awful shelter contribution, which is lower in the PCE (15%) than in CPI (36%) anyway, actual inflation is close enough to the target to make a rate cut plausible.

Bottom line, it’s still a minority opinion that inflation is not as bad as we think, and the minority view does not push yields. It’s yields and geopolitical uncertainty that are driving the dollar these days. Besides, the Fed does not fiddle with the data it is given, although it probably wishes it could. So, grain of salt. 

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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