Greenback regains footing as traders await data
The struggling dollar has finally found some support on Wednesday after testing its lowest levels since January 7. The US currency has fallen by more than 3% from its March peak erasing all gains for the year, which also coincided with a peak in US government yields. It is too early to suggest the greenback have reversed its two-month downtrend, but economic data releases today and on Friday need to be watched carefully for any signs of further strength.
While Federal Reserve officials spent the week downplaying any imminent threat about inflation, and to some extent convinced many market participants that any inflation surge is transitory, the language has changed a little compared to last month.
The Fed seems now in a transitory phase of “not thinking about thinking” about tapering to “thinking” about tapering. Federal Reserve Vice Chair Richard Clarida pointed out this week that Fed officials may be able to discuss scaling back the pace of asset purchases depending on data flow. This lays down the first hint for tighter monetary policy down the road, or at least a less-easy one.
The US yield curve has flattened out a bit over the past two weeks and breakeven rates also declined from multi-year highs. This is good news for the Fed and equity markets in general.
However, another shockingly high inflation print could change the market perspective again. Recent surveys from Bank of America and Deutsche Bank are showing that Covid19 or vaccine-resistant variants of the virus are no longer the top worry for markets. It is higher-than-expected inflation, implications on bond yields, and a central bank policy error that are concerning investors right now.
Today’s US economic calendar includes the releases of the revised Q1 GDP, Durable Goods Orders, Initial Jobless Claims, and Pending Home Sales. But it is Friday’s Core Personal Consumption Expenditures data that will be the biggest moving event for the US dollar. Markets are expecting an increase of 2.9% year-on-year in April versus 1.8% in March. If we saw a similar surprise to that of the April US CPI which came at 4.2% or 0.6 percentage points above expectations, expect the dollar to rally further and form a short-term bottom.