On Wednesday, the US dollar fell, driven by weaker-than-expected preliminary S&P Global PMIs. The composite index fell to 50.9, with the manufacturing sector contracting at 49.9 and the services sector also registering at 50.9. This performance contrasted with the euro zone’s composite PMI, which surpassed the US benchmark for the first time in a year. Although US growth exceptionalism faces challenges, ING analysts suggest the dollar’s decline may not be sustainable.
Market reaction to US PMIs comes ahead of the release of first quarter GDP growth figures. Analysts watch for possible currency moves driven by activity indicators, but significant changes in Federal Reserve expectations will likely be driven by inflation, employment data or Fed communications. Key upcoming events that could impact the dollar include PCE inflation data due on Friday, a Federal Reserve meeting on May 1, and employment numbers due on May 3. Currently, Fed Funds futures indicate that only a 40 basis point easing is expected this year.
Before the release of the PMI data, the narrative in currency markets was leaning toward risk sentiment, which generally leads to a weaker dollar. European stock markets have posted gains for three consecutive sessions, and US technology stocks are showing signs of support. Investors are showing a preference for currencies such as the Australian and New Zealand dollars, as well as Scandinavian currencies, which tend to perform well in risky environments. Conversely, the Canadian dollar is expected to underperform under such conditions, especially if the softer US data is a contributing factor.
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The DXY index, which is heavily influenced by the euro, has fallen below 106.0 but is still about 1.5% above its April low of 104.1. The market may not see significant moves in dollar pairs until GDP and, more importantly, PCE inflation numbers are released later in the week. While the dollar may see some pressure in the near term, strong GDP and PCE data could lead to a recovery above the 106.00 level by the end of the week.
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