Forex
Dollar drifts lower ahead of PCE data; Eurozone inflation expectations lowered
Investing.com – The U.S. dollar drifted lower Friday, ahead of the release of key U.S. inflation data, which could drive sentiment with the Federal Reserve meeting next week.
At 04:55 ET (08:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 105.395, having climbed to 106.00 on Thursday.
Dollar awaits PCE data
Data released on Thursday showed that U.S. grew at a 1.6% annualized rate in the January-March period, much slower than the 2.4% rate expected.
That said, the report also showed that underlying inflation as measured by the core personal consumption expenditures price index rose 3.7% in the first quarter, beating forecasts for a 3.4% rise.
Fed officials have made it pretty clear over the last few weeks that they remained concerned about inflation, prompting the market to rein in expectations of an early interest rate cut.
Attention now turns to the release later in the session of the data for March, widely seen as the Fed’s most important gauge of inflation.
“The main drivers of FX all point to a stronger dollar: higher Treasury yields, widening swap differentials in favour of the dollar, and falling equities,” said analysts at ING, in a note.
“There is a good chance that markets will scale back US rate cuts further if core PCE comes in at 0.4% month-on-month today.”
Eurozone consumer rein in inflation expectations
In Europe, rose 0.2% to 1.0746, benefiting from the dollar’s weaker tone.
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Eurozone consumers saw inflation in the next 12 months at 3.0%, just below the 3.1% expected a month earlier, according to the ECB’s Consumer Expectations Survey.
This was the lowest reading since December 2021.
However, inflation expectations for three years ahead held steady for a fourth consecutive month at 2.5%, above the European Central Bank’s 2.0% target.
The ECB is planning to cut interest rates in June but the outlook further out remains clouded by rising energy costs, stubbornly high services inflation and continued geopolitical tensions.
rose 0.2% to 1.2532, benefiting from the recent dollar weakness.
“The BoE policy meeting on 9 May is obviously the next big event for the pound, but data may still prove more important given a divided MPC,” said ING.
USD/JPY hits new 34-year high
In Asia, rose 0.6% to 156.58, rising past the 156 level to new 34-year highs after the left interest rates unchanged after a historic hike in March.
The central bank also forecast higher inflation in the coming years, but also forecast weaker economic growth, raising doubts over just how much capacity it would have to keep raising interest rates.
Softer-than-expected inflation data from Tokyo, released earlier on Friday, further sparked doubts over a hawkish BOJ.
edged 0.1% higher to 7.2466, remaining close to five-month highs.
rose 0.5% to 0.6552, supported by strong Australian inflation data, which, coupled with higher CPI reading earlier this week, sparked bets on higher-for-longer rates in the country.
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On Monday, Bank of America (BofA) provided insights into the potential actions of Commodity Trading Advisors (CTAs) in the coming week.
According to BofA, CTAs might continue to sell the U.S. dollar (USD) against most currencies following a trend that emerged after the Consumer Price Index (CPI) report led to a weakening dollar. The bank’s models indicate that USD long positions have been reduced this week.
The bank’s analysis suggests that in the foreign exchange (FX) market, CTAs are likely to persist with short covering in the euro (EUR), British pound (GBP), and Canadian dollar (CAD).
Additionally, there is an expectation for CTAs to increase their recently established long positions in the Australian dollar (AUD) and potentially initiate a long position in the Mexican peso (MXN), given the positive trend strength for the peso.
In the commodities sector, despite an increase in the price of gold last week, the trend for the precious metal declined, prompting CTAs to sell, albeit at a slower pace. BofA anticipates that this trend of selling gold and oil will continue into the next week.
The analysis also noted that CTAs’ long positions in are nearing extremely high levels, while long positions in aluminium are being unwound. In contrast, soybeans are experiencing short covering.
The bank’s report serves as a gauge of how trend-following traders might adjust their portfolios in response to market movements.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
On Monday, Bank of America (BofA) analysts provided insights into the current state of G10 foreign exchange (FX) markets, noting a general sentiment of disappointment among investors due to the markets’ lack of volatility.
Despite a recent reversal in the U.S. dollar (USD), major currency pairs have not moved significantly, staying within their established ranges. BofA anticipates further depreciation of the USD, yet it emphasizes that the currency’s movements are expected to remain close to year-end consensus forecasts.
The analysis highlighted that while markets have expressed a desire for more excitement in G10 FX trading, they must come to terms with the inherent trade-off between carry trade opportunities and higher volatility. Carry trades, where investors borrow in low-yielding currencies to invest in higher-yielding ones, have been identified as a dominant trend post-global financial crisis.
However, this strategy tends to reduce market volatility, leading to what BofA describes as an “uninspiring” and “stuck in the mud” trading environment.
BofA’s commentary suggests that the pursuit of carry as a passive strategy has been a factor in dampening volatility in the FX markets. The firm underscores that investors should not expect both high carry returns and high volatility, as these market conditions are typically mutually exclusive. The lack of clear fundamental trends in G10 FX has been a source of frustration for markets, but the current trend of carry is clear, even if it leads to lower volatility.
The analysts also touched upon the anticipation around the next batch of U.S. data, which many investors hope might shift the narrative. However, BofA indicates that such expectations may be overly optimistic. The firm’s message to the markets is to adjust expectations and accept the current dynamics, with the USD continuing to play a central role in the G10 FX space.
In summary, BofA’s analysis points to a continuation of the recent patterns in G10 FX markets, with a slight downward trend in the USD value but within the bounds of recent trading ranges.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com – The U.S. dollar is trading in a calm fashion against the majors of late, and these narrow ranges will likely stay for a while longer, according to Goldman Sachs, with divergence having to wait.
AT 05:20 ET (09:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded unchanged at 104.330, steadying after losing around 1% last week in the wake of soft U.S. inflation data.
“We think there is only limited room for the market to press Dollar shorts on the back of the inflation news,” said analysts at Goldman Sachs, in a note dated May 17.
“After all, while the prints were mostly in line with expectations, they were not in line with the target. As a result, the news does not change the policy outlook much beyond reinforcing the recent rhetoric.”
The subsequent market response has been reminiscent of the post-March FOMC FX reaction, when the response to ‘dovish dots’ stalled not because of fresh data, but instead because FX is still a relative game, and the Dollar fundamentals have not shifted much, the investment bank added.
And, this time around, we think the rally in front end rates looks more consistent with cyclical concerns rather than dovish expectations.
“That matters for FX because there is a narrow path for the Dollar to depreciate on a broad basis when growth is softening,” the bank added. “This is especially true in the current environment when faster Fed cuts would likely be met with easier policy abroad as well.”
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