It’s been a rocky week for the USD so far on the back of a relatively tame Core PCE figure (last Friday) and some sluggish manufacturing readings. The Dollar Index (DXY) had been riding high around the level; however, a spate of softer US macro data has bought a potential September rate cut from the Fed back into the picture. This shifting of expectations in favour of a possible first rate-cut occurring in September rather than November has taken the wind out of the sails of treasury yields, with the USD following suit. The DXY is languishing just above the 104 level, but will the downtrend continue from here?
The near-term direction of the USD from here will largely hinge on the numbers and sentiment generated by Friday’s key jobs report. So far in 2024, we have had five Non-Farm Payrolls (NFP) releases (including the December 2023 figures released in January 2024), and the jobs figures have produced an upside surprise in all but one. But crucially, and perhaps tellingly, the one time this year that NFP data missed the mark was last time around.
This week, expectations are that 185k jobs were created in May, however any result shy of this could be evidence that a prolonged period of higher interest rates is finally taking its toll on the the jobs front. In short, an upside print in the NFP could see the expected timeline for the first rate cut shift back in favour of November, while a downside miss could see September firm as the favoured month for potential action from the Fed. The USD will act accordingly.
With Eurozone inflation sitting at 2.6%, if the ECB are keen to cut rates as their messaging has suggested, then now would appear to be the time. While a 25bp cut at this week’s ECB meeting is largely priced in, the complication for the central bank is that inflation did tick higher from the previous reading. So, it will be interesting to see just how much confidence (or otherwise) the ECB has that inflation will remain tamed. EURUSD and euro cross rates could be quite volatile during the ECB event given the potential rate cut and rhetoric surrounding future policy moves.
Today’s Australian GDP data came in at just 0.1% for Q1, below the 0.2% expected and 0.2% in the prior quarter. This means that the RBA faces the conundrum of having growth heading south and inflation heading north (as evidenced by an uptick in the most recent CPI data). However, the AUDUSD shrugged off the disappointing GDP print, thanks to a better Caixin Serviced PMI number from China today.
In commodities, gold is trading steadily around the $2331 region (during Asian trading hours on Wednesday), below immediate resistance at $2349, while support lies at $2313. Gold has been confined to a relatively tight range this week, with the precious metal not getting the usual kick-along it receives from falling bond yields. While a softer USD has been favourable, gold has been steady rather than spectacular this week in the absence of fresh buying catalysts.
Meanwhile, oil has been on the slide after OPEC+ somewhat surprisingly detailed an exit plan for their voluntary cuts (at their meeting on the weekend). News that the voluntary production cuts (as opposed to their group-wide production cuts) are to be phased out has effectively re-added supply to the market, and the oil price turned lower in response.
For the rest of the week, we could see some tighter ranges in financial markets ahead of the NFP figures on Friday. But the volatility could kick-off once again if the NFP data alters the expected rate-cut timeline from the Fed.
