16.05.2024: USD drops as buyers increase their bets on Fed price cuts. S&P 500, EUR/USD, Brent
Economic data in the US still catch investors off-guard. Beijing is laying out concrete steps to boost its economy on a larger scale through long-term bonds. Australia recorded an increase in unemployment above forecasts. Japan reported weaker-than-expected GDP data for the first quarter. Nevertheless, the currencies of the Asia-Pacific region strengthened against the US dollar today.
For a start, the dollar/yen fell to 153.7, its lowest level in almost two weeks. This is despite Japan’s economy contracting 2% year-on-year in the first quarter of 2024.
GDP growth forecasts of 1.5% growth defied expectations as private consumption in the country declined for the fourth quarter in a row. The latest data complicates the task for the Bank of Japan which needs to balance support for the economy with efforts to protect the weak currency.
However, an even greater surprise for everyone was the decline in inflation in the US. The annual CPI dropped from 3.5 to 3.4% and naturally caused further weakening of the dollar.
Then, the pressure on the US currency worsened even more after retail sales data were published. Their growth rate slowed down in April so much that it fell to zero.
The disappointment was especially painful as forecasts had only expected a moderate decline from 0.6% in March to 0.4% on month. Thus, the evidence that the US economy has been losing momentum has been confirmed once again.
In theory, the situation could be improved by data on industrial production in the US published today. If, of course, they show growth rate at least at the level of the estimated 0.2%.
However, several policymakers of the Federal Reserve are also making their remarks today. After yesterday’s inflation data, they will be asked relevant questions. Indeed, they will hardly evade this issue. Most likely, the rhetoric of policymakers is still shifting towards monetary easing.
This dovish shift may well lead to an even further weakening of the US dollar. Yesterday, the US currency logged its sharpest one-day percentage drop in a year, immediately losing 0.75%. Other currencies hit multi-month highs against the US dollar before stabilizing.
Analysts say further dollar selling will likely depend on how the US and other policymakers react to the incoming statistics. In the meantime, on early Thursday, the US dollar index tumbled to a 5-week low of 104.07. Then, it again moved into the green corridor between 104.0 and 104.4, waiting for the next news.
The US stock market responded to the slowdown in inflation with a rapid rally in all three benchmark indices. The S&P 500 jumped by 1.2% yesterday, reaching a high of 5,308. Today it seems to be preparing to storm new highs within the intraday corridor between 5,263 and 5,312.
However, there is one more important factor to keep in mind. The 10-year US Treasury yield sank after the US CPI report to 4.34%, its lowest level since April 5. In this context, the scale of the dollar’s weakening looks so serious that it is quite possible to talk about the oversold market.
Other rivals from the basket of currencies managed to test multi-month highs against the greenback before stabilizing. For example, the AUD/USD pair increased by 1%.
Further sell-offs of the US dollar are directly dependent on the reaction of financial policymakers to current economic data. For example, if the Bank of Japan rushes to raise interest rates before the Federal Reserve begins rate cuts.
Data on retail sales and the consumer price index in the US no longer provide much-needed comfort for risk indicators. The possible timeline for the first rate cut by the Federal Reserve has again moved to September. According to the FedWatch Tool, investors now estimate the likelihood of a Fed rate cut at 75% in September and 85% in November.
00:00 INTRODUCTION
00:31 USD/JPY
01:14 U.S. INFLATION
01:31 USA RETAIL SALES
02:03 INDUSTRIAL PRODUCTION IN THE USA
02:17 FFRS DOUBTS
02:40 USDX
03:30 S&P 500
03:58 U.S. BOND YIELDS
04:52 CME WATCH TOOLS
05:22 EUR/USD
06:33 BRENT
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