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USD Gains Moderate as Rate Expectations Decline, Eyes on PCE and NFP

USD Gains Moderate as Rate Expectations Decline, Eyes on PCE and NFP

2018-05-31 11:35:00
Justin McQueen, Analyst
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USD Analysis and Talking Points

  • USD Slips as the Prospect of 4 2018 Rate Hikes Decline
  • US Data Remains Key for Monetary Policy Outlook, While Concerns Rise Over Trade Wars

For a more in-depth analysis on the USD, check out the Q2 Forecast for USD

USD Slips as the Prospect of 4 2018 Rate Hikes Decline

The US Dollar has moderated somewhat in recent sessions with rising uncertainty over politics within the Eurozone, most notably Italy, weighing on Fed rate hike expectations for 3 additional rate rises. Subsequently, the greenback and US bond yields have looked toppish with the US 10yr yield back below the psychological 3% level. According to CME FedWatch, rate expectations for 3 additional rate hikes fell to 27% from 38% a week ago.

USD Gains Moderate as Rate Expectations Decline, Eyes on PCE and NFP

Source: CME FedWatch

US Data in Focus

Today will see a deluge of data out of the US at 12:30GMT, most notably the PCE figures, in which the Fed’s preferred measure of inflation (Core PCE) is expected to dip to 1.8% from 1.9%. Given the recent comments from the FOMC that they are comfortable with an inflation overshoot, a fall to 1.8% pulling back from the central banks 2% target will likely to a continued easing in market pricing for 3 additional rate hikes, consequently keeping the greenback offered. Elsewhere, eyes will be on wage inflation pressures in tomorrow’s NFP report, which are expected to tick up 0.1ppt in both the monthly and yearly readings, whereby an upside surprise will help support the US Dollar.

Reminder: DailyFX Analyst’s David Song and Paul Robinson will provide live coverage of the NFP report from 12:15GMT, to register, click here

Potential for Trade War Escalation

President Trump is set to impose steel and aluminum tariffs on imports from the EU tomorrow, which could be announced later today after the US and EU failed to produce an alternative deal. In turn, this will likely spark a retaliation by the EU as they look to defend their interests, subsequently leading to an all-out trade war, which as a result would be negative for the global growth.

Overview of the impact from a trade war, click here

USD PRICE CHART: DAILY TIME FRAME (August 2017-May 2018)

USD Gains Moderate as Rate Expectations Decline, Eyes on PCE and NFP

Chart by IG

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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