U.S. soft patch forcing dollar bulls to mimic patient Fed

The USD/JPY sensitivity to dollar rates and the U.S. economy are at the root of the recent moves. The pair did not react much to the Fed status in September and the relatively disappointing job report in early October. 

The FOMC stance can be partly attributed to external factors (China) that it had to take under greater consideration than in the past. But a domestic US soft patch would provide a more convincing case for dollar bulls to mimic the patient behavior of the Fed. 

"Retail sales were much weaker than expected and prompted to revise down estimates for Q3 growth, the PCE growth is revised  from 3.9% to 3.5%. The PPI also significantly disappointed, falling by 0.5% (-0.2% expected) and declining monthly for the first time since February, which is the start of the period during which the USD/JPY troughed at 118.20", says Societe Generale.

The CPI data was marginally better than expected but the USD/JPY reaction was muted, suggesting a higher sensitivity to negative than positive surprises. The market was certainly looking for more fundamental background supporting recent Fed dovishness and postponement of the tightening cycle. It has been served and the dollar could continue to feel the pain.