Title: Daily Forex Outlook – Dollar Rebound Shows Renewed Vigor
By Francesco Pesole, ING Financial Markets
The US dollar displayed fresh momentum as markets reassess interest rate expectations, recent economic data, and global risk sentiment. This development arrives at a critical juncture where foreign exchange markets are closely analyzing shifts in central bank policies, inflation trajectories, and macroeconomic stability in key regions. In this Forex outlook, we explore the outlook for major currencies and factors that could drive additional gains in the US dollar in the short term.
Overview
The US dollar gained strength overnight as traders considered the implications of firmer US inflation and signs of resilience in the American economy. The DXY dollar index has shown signs of a rebound, reflecting heightened expectations that the Federal Reserve may take longer than anticipated to begin its rate-cutting cycle. Emerging market currencies and risk-sensitive majors came under moderate pressure, while safe-haven demand for the dollar emerged amid subdued market sentiment.
Key Themes Driving the Dollar’s Comeback
– Sticky US inflation: Inflation prints have stayed persistent, particularly in the services segment, strengthening the case for prolonged policy tightening by the Federal Reserve.
– Market repricing of Fed rate cuts: Markets had initially priced in earlier and deeper Fed rate cuts for 2024. However, recent data has prompted investors to reassess this timeline.
– Resilience in US macro data: Employment, retail sales, and purchasing manager indices show continued strength in US economic performance, challenging the need for immediate easing.
– Geopolitical and risk-off sentiment: Heightened uncertainty surrounding global economic recovery and geopolitical risks have nudged demand toward safe-haven assets like the US dollar.
Dollar Index (DXY) Update
The DXY index edged higher marginally, supported by a combination of US inflation data and the repricing of Federal Reserve expectations. Chair Jerome Powell’s remarks during the recent policy forum provided minimal new guidance, but previous Federal Reserve speakers pointed to a cautious approach to cutting rates too soon. Market participants now see the first cut as potentially delayed to September or even December 2024, contrasting sharply with earlier mid-year expectations.
Moreover, the recent commodities rally and potential inflation pressure have led to bets that holding onto dollar-denominated assets could maintain value if the real interest differentials remain attractive. A retest of DXY levels above 106.50 is not out of the question if the current environment persists.
EUR/USD: Struggling Near 1.0650
The euro-dollar pair stands under renewed pressure, as hawkish tones from the Federal Reserve continue to contrast with more dovish signals from the European Central Bank. The ECB’s April meeting minutes and recent speeches from policymakers exhibited comfort with the idea of June rate cuts, suggesting the ECB may act ahead of the Fed.
Key factors weighing on the euro include:
– Weakening eurozone data: Euro area PMIs and industrial production have disappointed, and lagged consumer growth reduces the potential for domestic monetary resilience.
– ECB dovish signals: Several ECB council members have hinted that one or even two rate cuts might be approved before the Fed initiates its own easing cycle.
– Political risks: Renewed concerns over regional elections and fiscal debates in large economies such as France and Italy continue to inject uncertainty into the eurozone.
EUR/USD has shown softness below 1.0700 and may challenge the 1.0600 technical support zone if dollar momentum continues. A closer approach by both divergences in policy outlook and growth patterns could see the pair drift lower toward the 1.0500 region before any potential turn.
GBP/USD: Struggles Amid Dollar Strength
Sterling is mirroring the euro’s recent pattern despite relatively stronger UK data. GBP/USD has declined, trading near 1.2440 in the latest sessions, reflecting dollar strength and global sentiment drag.
Primary forces influencing the UK pound include:
– Bank of England policy caution: While no immediate rate cuts are expected, the Bank of England has signaled it is past
Read more on EUR/USD trading.