It will be easy for the FOMC to surprise this market.

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Key developments and comments:
The US dollar firmed yesterday despite a soft US May Retail sales report yesterday, perhaps driven by squaring of stale short USD positioning at the margin ahead of tonight’s FOMC meeting. Still, it is difficult to conjure a hawkish scenario on that meeting tonight’s FOMC meeting with odds at only about 15% for a July cut and only a bit over 55% for a single cut through the mid-September FOMC meeting (FOMC preview below). Besides the tariff issue, do people really think that the high oil prices from the Iran-Israel conflict rate high on the Fed’s concern list if US labor market data continues to worsen badly? On that note, the interest scenario for the USD today is a new local high in the weekly jobless claims and continuing claims levels and perhaps May US housing starts data that is worse than expected as well. The risk of a weak housing market to sentiment and the US consumer is badly underestimated. A softer jobs market and rising unemployment could create far more forced selling that sees the pandemic-inflated bubble deflating rapidly. Inventories are already rising sharply and the latest NAHB survey of homebuilders dropped to the third-lowest level since 2012 for the June survey that was out yesterday.

EURUSD has challenged below key local support just below 1.1500, but arguably would need to capitulate through the 1.1450-1.1400 to suggest a more profound reversal – awaiting the post-FOMC price action for a status.

The yen firmed a bit yesterday on weak global risk sentiment, curbing enthusiasm for carry trades, with GBPJPY seeing the most significant reversal lower after it teased the top of the multi-month range. USDJPY resistance around 145.00 held again, as a squeeze as high as 145.44 overnight yielded to a push back toward the round level once again in late Asian trading.

Sterling weakened sharply yesterday across the board, as the currency is perhaps sensitive to risk sentiment. GBPUSD fell as far as 1.3422 overnight after trading as high as 1.3591 yesterday and EURGBP rallied above 0.8550 for the first time since April. The UK May CPI data this morning failed to drive any strong new view on the Bank of England meeting tomorrow, with Core inflation in at 3.5% as expected, down from 3.8% in April, while the Core Services number fell to 4.7% versus 4.8% expected and vs. 5.4% in April.

Chart: USDJPY
The USDJPY pair has been too quiet in recent weeks and feels ready for a slight narrative shift if today’s US data and the FOMC meeting grab the market’s attention on greater risks of an incoming US recession, but as well if the Iran-Israel confrontation raises concerns. Theoretically, Japan is vulnerable on that account due to its energy import dependencies, but the greater factor for the JPY may be financial flows, with plenty of signs of heavy duty carry trading in recent weeks that could be in for an ugly reversal if global markets tilt into a more decidedly risk-off mode. For now, tactically, the sloppy resistance area above 145.00 is the focus, while a chunky sell-off is needed (likely would need risk-off and dovish Fed) that threatens the 142.50 area again to set up some follow-through to 140.00 and beyond to the downside.