The US Dollar closed a failing May as the US Dollar Index fell about 1.4%, ending a 4-month winning streak. Now, with just 2 days to go this week, the USD is setting up for the best 5-day performance since late April. Is the US Dollar readying to resume its broader rally against the Euro, or will EUR/USD find the momentum to push higher in the days ahead?
Generally, rising US recession worries have pushed the markets to cut Federal Reserve rate hike expectations for 2023. This is as odds of a 50-basis point rate hike in September disappeared amid increasingly cautious commentary from the Fed. Now, strong US manufacturing data helped spark hawkish central bank policy expectations as June began.
Meanwhile, St. Louis Fed President James Bullard stated that ‘it is too early to say if inflation has peaked’. A combination of the data and the Fed speaking overnight helped boost Treasury yields. This is as the expected Fed policy gap narrowed, suggesting that the markets see the central bank increasingly closing the difference between benchmark lending rates and inflation in one year.
However, it might be too premature to look at further US Dollar strength until this week passes. That is because the highly anticipated NFPs report on Friday might disappoint. Looking at the Citi Economic Surprise Index tracking the US in the chart below, data has been increasingly underperforming relative to economists’ expectations as of late.
A softer jobs report could see the markets loosen some of the hawkish expectations priced in over the past couple of days. This could hurt the US Dollar and boost risk appetite, perhaps pushing EUR/USD higher. Otherwise, solid or in-line NFPs could see traders shift their focus back on the central bank fighting inflation.
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