Data may keep the USD defensive into month-end
The USD has weakened broadly over the past 48 hours, giving up some of its May gains heading into month-end. This has partly reflected broad pressure on risk positions, but equity markets bounced back overnight with little benefit for the USD. The USD’s inability to regain ground with equity markets likely reflects the extent to which currency market participants have become uncomfortably long dollars heading into next week’s key US data. US data overnight was on the weak side of expectations, with weekly jobless claims backing up to 354k and pending home sales gains slowing to 0.3%mom while Q1 GDP growth was revised down slightly. Friday’s releases are also likely to be unsupportive for the USD. We expect personal income and consumption to both have fallen 0.1%m/m in April, while the core PCE price index likely slowed to a 1% y/y rate, a new cycle low pace for this measure of inflation. We expect Chicago PMI to recover to 50 from last month’s 3-year low of 49, but this will still leave the measure below the average level of the previous 12 months. The final reading on Michigan May consumer sentiment is likely to moderate slightly after the big run up to post-crisis highs of 83.7 reported in the preliminary numbers. We think the USD can regain ground coming out of next week’s releases, particularly vs. the CHF and JPY (please see our Global FX Plus weekly for more details). In Japan, core nationwide inflation continue to fall, with headline core inflation for Apr declining for the sixth consecutive month by 0.4% YoY and headline declining -0.7%, albeit at an improved pace from -0.8% and -0.9%, respectively. This suggests the need for continued aggressive QE from BOJ in order to achieve their 2% target in two years.
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BNP Paribas