Market Overview

The dollar experienced a significant drop following unexpectedly weak U.S. CPI data but found some support due to the Federal Reserve's decision to trim its 2024 policy easing projections to just one cut. Additionally, the Fed raised its year-end inflation and neutral rates estimates. This juxtaposition of softer CPI data with a hawkish hold left futures markets largely discounting rate cuts in September and December. Consequently, two-year Treasury yields halved their initial 16 basis point drop post-CPI, aiding a partial dollar recovery. Initially, the CPI report boosted EUR/USD to 1.0852 before the pair backed off to a 0.6% gain as the Fed's forward guidance and Fed Chair Jerome Powell's cautious stance on easing weighed in.

Impact on Treasury Yields and the Dollar

Following Friday's strong non-farm payrolls and average hourly earnings data, which had sent yields and the dollar higher, the market has become highly sensitive to each new economic data release. This sensitivity reflects the Fed's stance that more data is needed to confirm inflation is on a sustainable path towards the 2% target. Two-year Treasury yields fell to their lowest in 10 weeks, more than erasing the gains that followed the jobs report before partially recovering. The dollar index saw a 0.6% fall, though it did not reach Friday's lows as yields also fell in other regions. Risk-sensitive currencies like the sterling and the Aussie briefly overtook their losses from Friday, buoyed by the tumbling yields and boosted risk acceptance.

USD/JPY and Upcoming BoJ Meeting

USD/JPY saw a 0.2% drop, rebounding from its 155.725 lows, with market focus shifting to the upcoming Bank of Japan (BoJ) meeting. There is potential for the BoJ to trim its Japanese Government Bond (JGB) purchases more significantly to support a weak yen, which is contributing to higher import costs. The focus now turns to Fed speakers for clearer policy direction and the U.S. retail sales report on June 18 to assess domestic demand strength. Powell highlighted strong consumer demand as a reason for not cutting rates currently.

Currency Summary

• EUR/USD: Rose by 0.6%, initially reaching 1.0852 before retreating.
• Dollar Index: Fell by 0.6%, failing to reach last week's lows due to global yield declines.
• USD/JPY: Dropped 0.2%, recovering from its intra-day low as market participants anticipate the BoJ's policy decisions.
• Sterling and the Aussie: Saw brief recoveries beyond their Friday losses, driven by a dip in yields and increased risk appetite.

Analysis and Future Outlook

The overall market sentiment remains reactive to new data releases, reflecting the Fed's data-dependent approach. Future movements in major currency pairs will hinge on upcoming U.S. economic data releases and central bank communications. If the Fed continues to emphasize data dependency and cautious easing, the dollar may see further support. However, if subsequent data, such as U.S. retail sales, indicate a stronger economy, it could bolster the dollar's recovery. Conversely, dovish signals from Fed speakers or weaker-than-expected data could pressure the dollar lower.

• EUR/USD: Could face resistance near 1.0900.
• USD/JPY: Its trajectory will depend on BoJ actions and broader market risk sentiment.
• Sterling and the Aussie: May continue to respond to shifts in risk appetite and relative yield movements, with potential volatility tied to central bank announcements and economic indicators.

USD/JPY Rebound in Asia

USD/JPY continued to rebound in Asia, moving from 156.57 to 157.04, following a plunge to 155.73 overnight after weak U.S. CPI data. The rebound is partly due to the Fed's "one-and-done" approach for this year and the wide rate differentials, especially with the BoJ likely to maintain accommodation. The upcoming BoJ meeting will be crucial in determining the pair's direction, with the market anticipating possible trims in JGB purchases to support the yen.

EUR/USD Offshore Gains

EUR/USD sustained offshore gains, steadying in a 1.0803-1.0815 range despite the U.S. dollar climbing 0.1%. The pair's performance will be influenced by Eurozone industrial production, U.S. PPI, and jobless claims data. Mixed momentum studies and easing moving averages suggest a negative setup, with resistance at 1.0852 and 1.0916, and support at 1.0735 and 1.0719.

AUD/USD and Fed Expectations

AUD/USD fell by 0.2% in Asia, extending its fall from a 0.6705 post-U.S. CPI high. The pair is weighed down by Fed officials dialing back expectations for 2024 rate cuts. However, a robust Australian employment report supports the Reserve Bank of Australia's (RBA) stance on keeping rates higher for longer. The pair is likely to trade within a broad 0.6550-0.6710 range, with resistance at 0.6700-10 and support at 0.6645-50, 0.6625-30, and 0.6580.

GBP/USD and UK Housing Market

GBP/USD was down 0.1%, near the base of a 1.2802-1.2785 range. The UK housing market faltered as early rate cut hopes faded, adding to weak jobs and GDP data this week. The pair's movement will likely be led by risk appetite and the U.S. dollar, with initial support at 1.2732-1.2859 and resistance at 1.2893.

BoJ Policy Outlook

Tokyo expects no major changes to Bank of Japan policy on Friday, with continued accommodation anticipated. Debate on further moves towards policy normalization will persist, particularly concerning JGB purchases and holdings of other market assets. Governor Kazuo Ueda admits the BoJ must taper its bond buying as it moves towards an exit from ultra-easy policy but has not announced a timetable. The economy is still considered fragile despite an upward revision to Q1 GDP. It will take more data before meaningful policy tightening is justified.

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