Dollar Index and Treasury Yields

The dollar index reversed its earlier losses, gaining 0.1% to reach 105 in the U.S. afternoon session. This boost came from stronger-than-expected U.S. PMI data, which elevated U.S. Treasury yields and dampened expectations for imminent Fed rate cuts. According to LSEG's IRPR page, there is now a 58% chance of a Fed rate cut in September and slightly above 80% odds for a November cut, significantly lower than before the data release. Futures are pricing in 36 basis points of easing for the year, much less than the -160 basis points anticipated at the start of 2024.

Euro and ECB Expectations

The EUR/USD pair dropped by 0.06% to 1.0815, erasing initial gains from positive German and eurozone PMI data due to stronger U.S. PMI results. The euro remains pressured amid expectations that the ECB will cut rates more rapidly and significantly than the Fed. LSEG’s IRPR indicates near 100% odds for a June rate cut by the ECB, with 58 basis points of cuts expected by year-end.

Central Bank Policy Divergence

Market focus is shifting towards the ongoing divergence in central bank policies and upcoming economic data releases. The U.S. dollar is likely to maintain its strength as long as U.S. economic indicators, such as the PMI data, continue to exceed forecasts, thereby lowering the chances of immediate Fed rate cuts. In contrast, the euro is expected to stay under pressure due to the ECB's anticipated aggressive rate-cutting strategy.

USD/JPY and Potential Intervention

The USD/JPY pair rose to 156.99, nearing a trend high of 157.19, driven by the significant interest rate differential between the U.S. and Japan. However, the pair may encounter resistance near the 160 level due to concerns over potential intervention by Japanese authorities, such as the Bank of Japan or the Ministry of Finance.

GBP/USD and Economic Data

GBP/USD fell by 0.15% to 1.2699, testing recent support at 1.2701. Mixed UK PMI data offered little support, but the pair remained close to Wednesday’s high of 1.2761. With parallel rate cut expectations for both the Fed and the Bank of England, GBP/USD is likely to remain near current levels unless significant data surprises occur.

Cryptocurrency Movements

In the broader market, Ethereum rose by 1.3% to $3,793 after hitting a new trend high of $3,946. Bitcoin, however, dropped by 2.5% to $67.6k, down from a session high above $70k. Both cryptocurrencies were influenced by rising Treasury yields, although Ethereum found support from optimistic expectations regarding ETH ETF registrations.

Market Drivers

Economic data, central bank policies, and market sentiment will continue to drive currency movements. Particular attention will be on how these factors affect rate expectations and yield differentials, which are crucial for major currency pairs and other financial assets.