Dollar and Yen Rise Amid Risk Aversion

The dollar and yen saw gains on Tuesday driven by risk aversion. However, the U.S. dollar retreated from its highs following a significant drop in JOLTS job openings, which highlighted weakening U.S. economic data.

Weaker U.S. Economic Data

The JOLTS report revealed job openings at 8.059 million in April, significantly below the forecasted 8.355 million. This marked a 23% decline from a year earlier, bringing job openings to their lowest level since February 2021. The downward revision for March further emphasized the cooling labor market. Additionally, Monday's weak ISM manufacturing report, a slightly cooler monthly core PCE rise, a plunge in the Chicago PMI, and a downward revision of Q1 GDP to 1.3% from 1.6% added to the negative economic outlook.

Geopolitical Uncertainties and Dollar Fluctuations

Geopolitical uncertainties, including elections in Mexico and India, also contributed to the dollar's fluctuations. The Mexican peso dropped 5.6% this week, and the Nifty 50 Indian stock index fell nearly 6%.

Currency Performance

EUR/USD and USD/JPY

Despite the developments, EUR/USD trimmed earlier losses to close down 0.2%. USD/JPY dropped 0.9%, influenced by Treasury yields hovering just above May's key lows. The yen's rise, propelled by its status as a major funding currency, led to significant de-risking flows, driving EUR/JPY and GBP/JPY down by 1%.

Euro and ECB Expectations

The euro remains under pressure with the ECB expected to announce its first rate cut at Thursday's meeting and at least one more by year-end. German unemployment unexpectedly rising has added to the euro's woes.

Sterling and BoE Outlook

Sterling fell 0.15% after rebounding from its intraday low of 1.2743. The BoE's dovish outlook, with the first rate cut not fully priced until November, has kept the pound under pressure.

AUD/USD and AUD/JPY

The AUD/USD and AUD/JPY also saw declines amid the risk-off sentiment, falling 0.58% and 1.5%, respectively.

Upcoming U.S. Economic Data

The market's focus now shifts to upcoming U.S. economic data, including the ISM non-manufacturing report on Wednesday and non-farm payrolls on Friday. Both reports are forecast to show improvements, but recent weaker-than-expected data suggests potential for further disappointment and subsequent dollar losses, particularly against the yen.

Treasury Yields and Central Bank Policies

The resilience of 2- and 10-year Treasury yields above May's crucial low supports will be critical. The BoJ is expected to navigate towards at least two rate hikes by year-end and manage JGB purchases to control yield rises. The ECB's decision on Thursday and its implications for future rate cuts will also be closely watched. Meanwhile, futures are projecting Fed rate cuts in September and December.

Conclusion

The dollar's performance is being influenced by weaker U.S. economic data, geopolitical risks, and shifting central bank policies. The yen has benefited from risk aversion, while the euro and sterling remain pressured by dovish central bank outlooks. Upcoming U.S. economic reports and central bank meetings will be pivotal in determining the near-term direction for these currencies. Traders will be closely monitoring these developments and adjusting their positions accordingly.

Open an account today to unlock the benefits of trading with CMS Financial

Open Account Now 💼