Dollar dips on weak US economic data

Important calendar events

• JPY: Average Cash Earnings, Household Spending
• GBP: BRC Retail Sales Monitor
• EUR: German Factory Orders, Retail Sales

USD

The dollar gained strength early on Monday but plummeted later in the day, with the dollar index dipping to the 104 level. US Treasury yields also retreated, with the 10-year bond yield dropping to 3.68%.

Weak US Services data pushed the dollar down on Monday. The ISM Services PMI index dropped to 50.3 in May from 51.9 in April, against expectations of 52.6. The index remained above the threshold of 50, indicating that the US Services sector is expanding but at a slowing pace.

Concerns about a potential US debt default have been causing economic uncertainty, affecting dollar prices. US President Joe Biden and Republican House Speaker Kevin McCarthy have negotiated a deal that will raise the government's $31.4 trillion debt ceiling, preventing the US from going into default. The US Congress passed the measure to raise the US debt limit on Friday, and the US President signed the deal on Saturday. As fears of a US debt default abated, the safe-haven dollar lost support.

Market odds that the Fed will continue raising interest rates are going down, and markets anticipate a pause in rate hikes at the next policy meeting in June. The Federal Reserve raised interest rates by 25 basis points at its latest monetary policy meeting, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%.

US Federal Reserve Chair Jerome Powell has indicated that the US Central Bank may pivot towards a more dovish direction. Many analysts predict that there is a high probability of rate cuts starting in November, depending on economic conditions and inflationary pressures.

The US economy expanded by 1.3% in the first year of 2023, against predictions of 1.1% growth. The preliminary GDP Price Index, which is an important inflation gauge, exceeded expectations, rising by 4.2% in Q1 of 2023 versus the 4.0% anticipated.

US Headline inflation dropped to 4.9% year-on-year in April, decelerating from a 5.0% print in March. US inflation cooled more than expected in April, as markets were anticipating a 5.0% print. 

The US Core PCE Price Index, however, rose 0.4% every month in April, versus a forecast of 0.3%. Core PCE, which is the Fed’s primary inflation gauge, went up by 4.7% year-on-year in April, having gained by 4.6% in March. Inflationary pressures in the US remain sticky, suggesting that the Fed may have to persist with its policy of monetary tightening to restore price stability.

TRADE USD PAIRS

EUR

The Euro gained strength against the dollar on Monday, and EUR/USD climbed to the 1.072 level. If the currency pair goes up, it may encounter resistance near 1.078. If the EUR/USD pair declines, it may find support at 1.063.

Weak economic activity data for some of the Eurozone’s leading economies put pressure on the Euro on Monday. Services PMI data for Spain, Italy, France, and Germany fell below expectations, showing decreased sector growth in May compared to April’s print. Eurozone Services PMI dropped to 55.1 in May from 55.9 in April, against expectations of 55.9. The index, however, remained firmly above the threshold of 50, indicating that the services sector continues to expand, even though growth has slowed.

ECB President Christine Lagarde stated on Monday that inflationary pressures in the Eurozone remain high and that borrowing costs will be raised further to tackle them. Lagarde’s comments point to further rate hikes ahead, while the US Fed has signaled a pause in rate hikes.

The ECB raised interest rates by 25 bp at its latest monetary policy meeting, bringing its main refinancing rate to 3.75%. The ECB had raised interest rates by 50 bp in previous meetings and is slowing down the pace of rate hikes. The ECB has left the door open for further rate hikes as inflationary pressures in the EU remain high.

Headline inflation in the Eurozone cooled to 6.1% year-on-year in May from 7.0% in April, beating expectations of 6.3%. Core Inflation, which excludes food and energy, also slowed to 5.3% on an annual basis in May versus 5.6% in April and a 5.5% forecast. The latest inflation print is showing that the ECB’s efforts to bring inflation down are paying off, but it will likely not be sufficient to induce the central bank to abandon its hawkish policy just yet.

GDP Flash data for the first quarter of the year showed that the Eurozone economy expanded by 0.1%, registering a small improvement against the 0 print for the final quarter of 2022.

TRADE EUR PAIRS

GBP

The Sterling was volatile on Monday, with GBP/USD dropping to 1.236 in early trading before paring losses and climbing to 1.244. If the GBP/USD rate goes up, it may encounter resistance near 1.254, while support may be found near 1.230.

Final Services PMI data released on Monday for the UK were in line with expectations. The PMI index rose slightly to 55.2 in May from 55.1 in April, against expectations of 55.1. The Services sector in the UK keeps expanding, with the PMI index remaining above the threshold of 50, indicating growth.

Headline inflation in the UK dropped below 10% on an annual basis in April for the first time since August 2022. Inflation in the UK is starting to cool, although not as rapidly as anticipated. Headline inflation rose by 8.7% year-on-year in April from 10.1% in March, surpassing expectations of 8.2%. Core CPI, which excludes food and energy, however, rose to 6.8% on an annual basis in April from 6.2% in March.

BOE governor Andrew Bailey has warned that inflation in the UK is persistent and will require further tightening to bring inflation to target. The BOE raised interest rates by 25 basis points at its latest meeting in May, bringing the bank rate to 4.5%. Market odds are in favor of more BOE rate hikes up ahead, and many analysts predict no rate cuts at all within the year. The BOE has been following an aggressively hawkish monetary policy, aiming to bring inflation down. 

The British economy contracted by 0.3% in April, after registering stagnation in March. The International Monetary Fund, however, upgraded the UK’s growth prospects, stating that a recession was now unlikely. The IMF had previously forecast that the British economy would contract by 0.6% this year. 

The UK’s weak economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.

TRADE GBP PAIRS

JPY

The Yen benefited from the dollar’s weakness on Monday, and USD/JPY rose to 139.5. USD/JPY had been moving close to a six-month peak earlier this week. If the USD/JPY pair declines, it may find support near 137.4. If the pair climbs, it may find resistance at 141.

Japanese authorities are reportedly watching the currency market and may intervene to boost the currency against excessive short selling.

The BOJ decided to continue its dovish monetary policy at the bank’s latest meeting in April. This was the first meeting with the newly-appointed BOJ Governor, Kazuo Ueda, at the helm. Japanese policymakers maintained ultra-low interest rates at the BOJ policy meeting, keeping the central bank’s refinancing rate at -0.10%.

Ueda has stated that monetary policy will remain accommodative until the bank’s 2% inflation target becomes sustainable. He also predicted that price pressures would fall sharply in the next year.

BOJ Core CPI rose to 3.0% year-on-year in April from 2.9% in March. April’s print exceeded expectations of 2.8% growth, indicating that price pressures in Japan continue to rise. Tokyo Core CPI for April was also hotter than expected, at 3.5% annually, against expectations of a 3.2% print. Inflation in Japan remains steadily above the BOJ’s 2% target, putting pressure on businesses and households.

Preliminary GDP data for the year's first quarter were optimistic, showing that the Japanese economy expanded by 0.4% in Q1 of 2023, after reaching stagnation during the last quarter of 2022. The GDP data exceeded expectations of 0.2% growth in the first quarter of the year, alleviating recession concerns for Japan. The final GDP Price Index printed showed a 2.0% annual expansion, versus 1.2% the previous quarter. Japan’s economic recovery increases the odds of a hawkish pivot in the BOJ’s monetary policy.

TRADE JPY PAIRS

The content provided in this material and/or any other material that this content is referred to, whether it comes from a third party or not, is for information purposes only and shall not be considered as a recommendation and/or investment advice and/or investment research and/or suggestions for performing any actions with financial products or instruments, or to participate in any particular trading strategy and cannot guarantee any profits. Past performance does not constitute a reliable indicator of future results. TopFX does not represent that the material provided here is accurate, current, or complete and therefore shouldn't be relied upon as such. This material does not take into account the reader's financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of TopFX, no reproduction or redistribution of the information provided herein is permitted.

Written by:
Myrsini Giannouli

Share the article: