Dollar Doldrums

May 20, 2024

Elias Haddad

Dollar Doldrums

There are no policy relevant US or Eurozone economic data releases today. The global May PMI readings Thursday will determine if growth traction is shifting against the US.

Fed speakers today are expected to emphasize the higher-for-longer policy rate environment.

The recovery in UK housing market activity is stalling.

Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

USD is starting the week on the backfoot against most major currencies on narrower bond yield spreads between the US and other major economies. Fed funds future pricing for a first rate cut in September (80% discounted) is also curtailing USD strength and supporting risk assets. Stocks in Asia and US equity futures are up.

There are no major US economic data releases this week can could trigger a delay in expectations for Fed easing. Instead, the global May PMI readings Thursday will help determine if economic growth momentum is indeed shifting from the US towards other major economies. If so, bond yield spreads between the US and other major economies can narrow further against USD. Nevertheless, US bond yields remain relatively high and continue to support the year-to-date uptrend in USD.

Fed speakers today are expected to emphasize the higher-for-longer policy rate environment. Atlanta Fed President Raphael Bostic (voter) (12:30pm and 1:45pm London), Fed Vice Chair for Supervision Michael Barr (2:00pm London), Fed Governor Christopher Waller (2:00pm London), Fed Vice Chair Philip Jefferson (3:30pm London), Cleveland Fed President Loretta Mester (voter) (7:00pm London).

GBP/USD is near a two-month high above 1.2700 on USD weakness. The recovery in UK housing market activity is stalling. Rightmove national asking price rose 0.8% m/m in May vs. 1.1% in April. Year-over-year, the asking price growth rate slowed to 0.6% from 1.7% in April. Encouragingly, the rise in net mortgage approvals to the highest since September 2022 points to firmer house prices.

EUR/USD is building on last week’s gains and trading near 1.0880. There are no policy-relevant Eurozone economic data releases today or scheduled ECB speakers. Thursday’s ECB indicator of negotiated wage rate for Q2 is the domestic data highlight and is expected to seal the deal for a June policy rate cut.

AUD/USD is up around 0.6700 and approaching its highest level since mid-January. Delayed expectations for RBA policy rate cuts and firmer iron ore prices underpin the rally in AUD/USD. The RBA minutes of the May meeting is the domestic focus (tomorrow, 2:30am London). The minutes will offer details on the discussion around tightening policy further which can bode well for AUD. Recall, during her post-meeting press conference RBA Governor Michele Bullock said the board discussed option of raising rates at the May meeting.

USD/JPY is range-bound around 155.70 and down from its April 29 pre-intervention high of 160.17. Narrower US-Japan 10-year bond yield spread is a near-term headwind for USD/JPY. Nonetheless, the bar for an aggressive BOJ tightening cycle is high because underlying inflation in Japan is in a firm downtrend and nearing the BOJ’s 2% target. As such, 10-year JGB yields will struggle to adjusted significantly higher which is a drag for JPY. Japan’s April CPI print is released Friday.

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