On Wednesday, analysts from ING expressed skepticism about the sustainability of the recent drop in the U.S. dollar, following weaker-than-expected S&P Global PMIs. The composite index declined to 50.9, with manufacturing dipping into contraction at 49.9 and services slowing to the same figure. This data came as a surprise to markets, particularly in contrast to the eurozone's PMIs, which for the first time in a year surpassed the U.S. composite PMI. The divergence highlighted a stronger service sector in the eurozone, challenging the narrative of U.S. growth exceptionalism.
The market's reaction to the U.S. PMIs has been to favor currencies like the Australian and New Zealand dollars, as well as Scandinavian currencies, which are seen as more responsive to risk-on sentiment. Meanwhile, the Canadian dollar has not been as quick to rally in response to the softer U.S. data. The dollar index (DXY), which is heavily influenced by the euro, has fallen below 106.0 but is still 1.5% above its April lows.
ING pointed out that major repricing in Federal Reserve expectations could be triggered by data on inflation, employment, or communications from the Fed itself. Key events that could impact the dollar in the near term include the Personal Consumption Expenditures (PCE) inflation data on Friday, the Federal Reserve meeting on May 1, and the release of jobs data on May 3. The Fed Funds futures curve is currently pricing in only 40 basis points of easing for the year.
The firm also noted that U.S. equities, particularly tech shares, have found some support, and European equities have enjoyed three consecutive positive sessions. However, the FX market may not see significant movements in dollar crosses until the GDP and PCE figures are released later in the week. According to ING, resilient GDP and PCE data could potentially support a rebound in the dollar above 106.00 by the weekend.
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