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Dollar eyes weekly gain, but Fed pivot bets increase


Disappointing US data revives Fed pivot speculation

ECB to stay the course on rate hikes

Yen enjoys safe-haven flows, inflation data also help

Wall Street skids after gloomy earnings

Investors see one more Fed hike, but still expect rate cuts

The US dollar slid against most of its counterparts on Thursday, but it seems to be regaining ground today.

Following hawkish remarks by Fed Governor Waller last Friday, investors became more confident that another hike will be delivered in May and scaled back some basis points worth of rate cuts by the end of the year, allowing the greenback to start eyeing its first weekly gain in nearly two months. Just a couple of days before the Fed’s blackout period, Cleveland Fed president Mester noted that the US central bank still has more hike arrows in its quiver, adding more credence to the May hike case.

Having said that though, the rebound in the dollar this week clearly does not signal the start of a stellar comeback. Data did not allow recession fears to ease, with the latest releases prompting market participants to start pricing in again around 50bps worth of rate reductions by December, with more cuts to follow during 2024.

Yesterday’s data showed that initial jobless claims rose again last week, with the figure for the prior week being revised up, adding to the notion that the labor market is gradually cooling. What’s more, a survey from the Philadelphia Fed revealed that manufacturing in the region shrank to its lowest level in nearly three years in April, with firms expecting activity to stay subdued over the next two quarters.

Lagarde appears hawkish again; Yen attracts flows

In contrast to the Fed, the ECB is forecast to deliver around 75bps worth of additional rate hikes and not to touch the cut button this year. In a speech yesterday, President Lagarde said that Eurozone inflation is too high and that monetary policy “still has a bit of way to go” before bringing inflation to heel.

Once again, her comments corroborated investors’ expectations and thus, any setbacks in euro/dollar are likely to stay limited and short-lived. The divergence in monetary policy expectations between the ECB and the Fed could result in another break above 1.1035 soon, a move that might initially pave the way towards the 1.1175 territory, which offered strong support between November 2021 and January 22, and acted as resistance on March 27.

The yen is the only currency against which the dollar is failing to gain today. Perhaps the Japanese currency attracted safe-haven flows amidst concerns about the state of the US economy, but it may have also received support after Japan’s inflation data showed that the month-over-month rate of consumer prices rebounded to 0.4% from -0.6%. The forecast was for a smaller rebound to 0.1%.

This may have raised questions as to whether inflation in Japan could continue slowing fast henceforth, stimulating market expectations that the BoJ may need to proceed with more normalization steps soon. The Bank gathers next week but given that this will be the first meeting with Ueda at the helm, there may not be any policy changes. Officials may decide to wait for a few months.

Recession fears weigh on Wall Street

All three of Wall Street’s main indices slid on Thursday following disappointing earnings results from Tesla and AT&T.

Shares of the electric car maker fell almost 10% after the firm reported its lowest gross margin in two years, with CEO Elon Musk saying that they will keep cutting prices to lift demand. That triggered worries of a potential price war, hurting shares of other carmakers as well. AT&T shares tumbled more than 10% as the company missed estimates for revenue and free cash flow.

Worries about the performance of the US economy could continue weighing on equities, but it still seems unwise to call for a bearish outlook in the longer run as expectations of lower interest rates in the US towards the end of the year may allow some investors to stay in the game. The S&P 500 seems to be struggling to clear the 4150 ceiling, but with the next evidence that interest rates may begin to decrease sooner rather than later, the index may gather the necessary momentum to overcome that obstacle. The outlook of the index may darken upon a clear dip below 3800.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-dollar-eyes-weekly-gain-but-fed-pivot-bets-increase-178145
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