Dollar Index Performance

The dollar index fell by 0.08% on Friday, marking a similar decline for the week. This followed a series of softer-than-expected U.S. data releases since Wednesday's pessimistic Beige Book report, which pulled Treasury yields off late-May highs.

Key Data Points

• PCE Inflation Gauges: Both U.S. overall and core PCE inflation rose 2.7% and 2.8% year-on-year, respectively, as forecasted. However, the monthly core PCE increase of 0.2% was below the expected 0.3%.
• Personal Consumption: Personal consumption rose by 0.2%, missing forecasts of a 0.3% increase, with March's rise revised downward to 0.7%.
• Chicago PMI and Trimmed-Mean PCE: The Chicago PMI reached its weakest point since the pandemic. The Dallas Fed's trimmed-mean PCE rate dropped to 2.7% annualized, down from 3.3% in March.

These modest misses led to a decline in two- and ten-year Treasury yields by about 4 basis points. There were only slight increases in futures pricing for Fed rate cuts in September and December.

Upcoming U.S. Data

Next week’s key U.S. data releases will be crucial for determining the dollar's direction. Key reports to watch include:

• ISMs and JOLTS: Both manufacturing and services ISMs are expected to show firmer readings, while JOLTS data is anticipated to slide towards pre-pandemic levels.
• Non-Farm Payrolls Report: Forecasted at 180k from April's 175k. The jobless rate is expected to remain steady at 3.9%, with average hourly earnings predicted to rise by 0.3% month-on-month and 3.9% year-on-year.

These reports will provide new insights into the economy and potential Fed policy, influencing the dollar’s yield support.

EUR/USD Performance

EUR/USD initially rallied on the PCE report but faced resistance near the May and April highs just shy of 1.09, ending up 0.17% on the day and 0.04% for the week.

• Euro Zone Inflation: Driven by rebounding services prices, inflation was marginally supportive.
• German Retail Sales: A larger-than-expected fall in German retail sales painted a mixed picture.

The ECB is highly favored to cut rates next week, with another potential cut in October.

USD/JPY Movements

USD/JPY dropped to flat post-U.S. data but recovered for a 0.25% gain, aligning with a broader dollar rebound and steadying Treasury yields. Confirmed interventions by Japan's Ministry of Finance and falling Treasury-JGB yield spreads suggest a challenging environment for long speculators as intervention points below 158 and near 160 loom.

Sterling and Broader Currency Market

Sterling remained flat, struggling amid a more risk-off market sentiment since midweek.

• Euro Movements: Limited by mixed euro zone economic data.
• Yen Influences: Affected by confirmed interventions and yield spread dynamics.
• Pound Challenges: Faced difficulties in a risk-off environment.

The broader currency market exhibited mixed movements, with the dollar showing resilience despite softer U.S. data. This highlights the nuanced interplay of economic data and central bank policies shaping the currency landscape in the coming weeks.

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