The dollar took a hit yesterday as US S&P Global PMIs came in weaker than expected. The composite index dropped to 50.9, with manufacturing moving back into contraction (49.9) and services slowing to 50.9. While these surveys aren’t as highly regarded as the ISM in the US, markets were probably surprised by the diverging patterns with eurozone PMIs. For the first time in 12 months, the eurozone composite PMI is higher than the US one. While the manufacturing picture remains much more clouded in the eurozone, the service sector appears to be in better shape.
All this is naturally in contrast with the notion of US growth exceptionalism. Tomorrow, we’ll see how much GDP growth has slowed in the first quarter. While activity indicators could prompt some FX moves, the kind of major repricing in Fed expectations that we saw in April can only be triggered by lower inflation, soft employment figures, or Fed communication. So, the major risk events for the dollar in the coming days are: PCE inflation on Friday, the Fed meeting on May 1, and jobs data on May 3. The Fed Funds futures curve continues to price in only 40bp of easing this year.
Even before US PMIs were released, the FX market was navigating a risk-on, dollar-off narrative. European equities have now had three consecutive good sessions, and US tech shares are finding some support. Markets are putting money to work in FX by favoring antipodeans (Aussie and New Zealand dollar) and scandies (Norway’s krone, Sweden’s krona) more than others in G10. These are the four high-beta currencies that have shown the clearest risk-on character, while the Canadian dollar should remain a laggard in risk rallies – especially when fueled by softer US data.
The euro-heavy DXY index has slid below 106.0, but remains some 1.5% higher than the April lows (104.1). We may not get much excitement in dollar crosses until GDP and most importantly PCE figures are released later this week. The dollar may stay under some modest pressure for a bit longer, but resilient GDP and PCE could favor a return above 106.00 by the weekend.
Francesco Pesole
