A signal first arising in the dermis to initiate the development of hair follicles has been described for many decades. Wnt is the earliest signal known to be intimately involved in hair follicle induction. However, it is not clear whether the inductive signal of Wnt arises intradermally or intraepidermally. Whether Wnt acts as the first dermal signal to initiate hair follicle development also remains unclear. Here, we report that Wnt production mediated by Gpr177, the mouse Wls orthologue encoding a Wnt trafficking regulator, is essential for hair follicle induction. Cell-type specific abrogation of the signal reveals that only epidermal, but not dermal, production of Wnt is required. An intra-epidermal Wnt signal is necessary and sufficient for hair follicle initiation. But, the subsequent development depends on reciprocal signaling crosstalk of epidermal and dermal cells. Wnt signals within the epidermis and dermis, and crossing between the epidermis and dermis, have distinct roles and specific functions in skin development. This study not only defines the cell type responsible for Wnt production, but also reveals a highly dynamic regulation of Wnt signaling at different steps of hair follicle morphogenesis. Our findings uncover a mechanism underlying hair follicle development orchestrated by the Wnt pathway.