Dollar Index Performance

The dollar index rose by 0.2% on Wednesday, driven by a sharp rebound in USD/JPY. This was despite a surprisingly strong ISM services report overshadowing a below-forecast ADP employment report. Treasury yields continued to probe May's technically pivotal lows. Market attention now shifts to Friday's U.S. jobs report to assess if the ADP drop to 152k serves as an early indicator.

Euro Movements

EUR/USD retreated towards the previous session's lows, falling 0.12% and slightly breaching Tuesday's 1.08585 risk-off retreat low and the daily tenkan support at 1.0852. The euro zone final May PMI readings showed gains over April amid nascent recovery hopes, but a larger-than-expected drop in April PPI kept bund yields lower, mirroring Treasuries. The ECB is expected to cut rates on Thursday, with the timing of further easing dependent on upcoming data, currently projected to outpace eventual Fed cuts.

Yen Dynamics

USD/JPY reversed Tuesday's retreat from yen-funded carry trades following elections in Mexico and India, stalling at Tuesday's 156.48 high as Treasury-JGB yield spreads did not benefit from the ISM report. A robust payrolls report on Friday might be necessary to challenge May's 157.99 high, near the level where the BoJ last intervened. Despite Japanese policymakers' efforts, real wages fell for the 25th consecutive month in April due to yen weakness raising import costs. However, Japan's May composite PMI rose to 52.6, significantly up from November's 49.6 low.

Sterling Fluctuations

Sterling experienced volatility, swinging from early gains to losses after the ISM report, then to marginal gains as Treasury yields remained heavy. This week's rise above 1.28 created a bearish divergence with overbought daily RSIs, though Gilts-Treasury yield spreads and rebounding risk acceptance provided support.

Canadian Dollar Impact

The anticipated BoC rate cut on Wednesday, combined with the strong ISM report, pushed USD/CAD up 0.11%, with the May 23 recovery high at 1.3743 capping the advance at 1.3741. Despite being lower on the U.S. data watch list, a 4.4% slide in MBA new mortgage applications, returning to 2024's lows, highlighted the impact of 30-year mortgage rates near 7%.

Upcoming Economic Data

Thursday will bring euro zone retail sales ahead of the ECB's expected rate cut, followed by U.S. jobless claims, Q1 labor costs, and productivity data. The dollar's rise was underpinned by the ISM services report, which overshadowed weaker-than-expected ADP employment data. The macroeconomic focus now shifts to Friday's U.S. jobs report, crucial for assessing the labor market's strength.

Summary

• Dollar Index: Boosted by strong ISM services data despite weak ADP employment.
• Euro: Mixed economic data and ECB rate cut expectations weakened EUR/USD.
• Yen: USD/JPY influenced by stable JGB yields and risk aversion, with a focus on upcoming payroll data.
• Sterling: Volatility due to technical factors and economic data, with gains tempered by overbought conditions.
• Canadian Dollar: Weakened following BoC rate cut and high mortgage rates, highlighting housing market strain.

The market remains focused on upcoming U.S. economic reports, particularly the jobs report, which will provide further clarity on the Fed's policy trajectory and influence currency movements in the near term.

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