USD Softer on Tuesday

The US Dollar remains under pressure across early European trading on Tuesday. US markets return today following the Memorial Day holiday in the states yesterday and traders are bracing for a slew of key economic releases this week. The headline report will be the latest core PCE data due on Friday.

Fed Easing Expectations

As the Fed’s preferred inflation gauge, the data will be used as a key benchmark for assessing the likelihood of September easing. On the back of cooler CPI in April, traders had begun increasing their expectations for Q3 easing. However, significant pushback from Fed members, including a hawkish set  of FOMC minutes, has seen easing expectations dwindling again.  Policymakers have been stridently clear about their concern over inflation. Several members have urge the Fed to hold rate at current levels for longer, citing dissatisfaction with inflation progress. Indeed, the FOMC minutes revealed that some members even support further tightening if inflation doesn’t start to fall again soon.

Core PCE: Market Implications

With this in mind, Friday’s data takes on paramount importance and has clear market implications: any sign of a fall in PCE and near-term easing expectations will rise again, weighing on USD, any stickiness or rise in inflation and near-term easing expectations will dissipate, leading USD higher. The data will have high level cross-market impact given the current focus on establishing the likelihood of forthcoming easing. Risk markets will remain highly sensitive to USD moves near-term.

Technical Views

DXY

The index has fallen lower again following a failed attempt at getting back above the 104.95 level. Price is now once again testing the bull channel lows and with momentum studies bearish, risks of a further breakdown are growing, turning focus to deeper support at the 103.48 level next.