Dollar Index and Treasury Yields Decline 

The dollar index fell 0.43%, erasing most of Wednesday's gains as Treasury yields retreated. This decline followed a pessimistic Beige Book report and a series of dovish U.S. data releases on Thursday. These included downward revisions to Q1 GDP and core PCE, higher jobless claims, and significant misses in trade deficit and pending home sales. While each piece of data alone might not have significantly impacted yields or the dollar, their combined effect led to a substantial pullback, particularly after Wednesday’s dollar rebound peaked near key resistance levels against the euro and yen. Market participants are now turning their attention to Friday's key April PCE data.

Focus on Upcoming Economic Data 

Looking ahead, the focus will be on upcoming economic data to gauge the trajectory of central bank policies. The dollar's direction will be influenced by Friday's U.S. PCE data, as well as next week's ISMs, JOLTS, and employment reports. The EUR/USD rose 0.37%, supported by record-low euro zone unemployment and improving economic sentiment, despite the ECB signaling its first rate cut at next week's meeting. Treasury yields fell, while bund yields were slightly higher, with Fed rate cut expectations now at just 35 basis points by year-end. Fed President John Williams commented that current policy is well-positioned to lower inflation, which he expects to moderate in the second half of the year.

Significant Movements in Currency Markets

 The currency market saw significant movements, with EUR/USD rebounding from key technical supports. The pair needs to clear May's twin peaks and April's high near 1.09 to signal a broader advance. USD/JPY slid 0.6% to its lowest in six sessions, in line with falling Treasury-JGB yield spreads. The yen's strength followed suspected Japanese intervention earlier in the month. Despite attractive yield spreads for carry traders, a close below last week's 155 low could hint at a larger correction in the uptrend. Sterling rose 0.32%, finding support ahead of last week's lows and remaining sensitive to upcoming U.S. data due to a lack of imminent UK releases. The Swiss franc was a notable gainer, rising 1.1% against the dollar and 0.73% versus the euro after hawkish comments from SNB Chairman Thomas Jordan.

Dynamic Currency Outlook 

Overall, the currency outlook remains dynamic, with multiple factors at play. The dollar's recent decline could be reversed if upcoming U.S. data, particularly the PCE and employment reports, support a more hawkish Fed stance. The euro's strength hinges on euro zone economic data and ECB policy signals, while the yen's performance will be closely tied to yield differentials and potential BoJ interventions. The pound's trajectory will depend on U.S. economic data and the BoE's policy path, while the Swiss franc may continue to strengthen if the SNB maintains a hawkish stance. Market participants will need to navigate these developments carefully to assess the near-term direction of major currencies.

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