The USD index rebounded from 5-week lows yesterday, buoyed by data showing a 0.9% increase in US import prices last month. This data tempered some of the optimism about US disinflation and potential Federal Reserve (Fed) rate cuts that had emerged earlier in the week. Despite this rebound, following a slightly softer CPI report and signs of a cooling US economy and job market, the USD is on track for a weekly loss and is experiencing its worst month of 2024.
The slowdown in consumer prices led markets to anticipate that the Fed might cut rates twice this year, with the first cut possibly coming as early as September. However, concerns are resurfacing as import and export prices rose more than expected, alongside a surprise increase in producer prices earlier in the week. This suggests that inflation is moderating above the Fed’s 2% target, which could delay plans for rate cuts and potentially keep the USD stronger for a longer period.
The recent aggressive sell-off in the USD highlights our ongoing theory of its asymmetric reaction to incoming data—falling more on data misses than rising on data beats. However, we believe the market overreacted this week, as reflected in the dollar’s modest bounce-back yesterday.
GBP is set for its second-largest weekly rise against the USD this year and is poised to break a two-week losing streak against the euro. As a pro-cyclical currency, the pound benefits from improving global growth prospects. Recent expectations of global easing, which support economic growth, have been the primary driver of sterling’s strength.
The EUR trended lower in Thursday’s session after reaching a new multi-week high, as the market consolidated following the US CPI report. EUR/USD erased nearly half of the gains made on Wednesday, introducing some short-term bearish technical signals. Despite this, the pair remains on track to achieve its fifth consecutive weekly gain, marking the best week-on-week performance in over a year and its largest weekly gain (+0.9%) since March 8th.
