On Wednesday, the US dollar experienced a decline, influenced by weaker-than-expected preliminary S&P Global PMIs. The composite index fell to 50.9, with the manufacturing sector dipping into contraction at 49.9 and the services sector also registering at 50.9. This performance contrasted with the eurozone's composite PMI, which surpassed the US measure for the first time in a year. Despite the US growth exceptionalism narrative facing challenges, analysts from ING suggest the dollar's drop may not be sustainable.
The market's response to the US PMIs comes ahead of the release of first-quarter GDP growth figures. Analysts are watching for potential foreign exchange movements triggered by activity indicators, but significant changes in Federal Reserve expectations are likely to be driven by inflation, employment data, or Fed communications. Key upcoming events that could affect the dollar include PCE inflation data expected on Friday, a Federal Reserve meeting on May 1, and employment figures due on May 3. Currently, Fed Funds futures indicate only a 40 basis point easing projected for this year.
Prior to the PMI data release, the narrative in foreign exchange markets leaned towards risk-on sentiment, which typically leads to a weaker dollar. European stock markets have seen gains for three consecutive sessions, and US technology shares are showing signs of support. Investors are showing a preference for currencies like the Australian and New Zealand dollars, as well as Scandinavian currencies, which tend to perform well in risk-on environments. Conversely, the Canadian dollar is expected to lag in such conditions, particularly when the softer US data is a contributing factor.
The DXY index, which is heavily influenced by the euro, has dropped below the 106.0 mark but is still approximately 1.5% above its April low of 104.1. The market may not see significant movements in dollar pairs until GDP and, more importantly, PCE inflation figures are released later in the week. While the dollar may face some pressure in the short term, strong GDP and PCE data could lead to a rebound above the 106.00 level by the end of the week.
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