The US dollar gained mid-week due to rising Treasury yields, buoyed by strong economic data, hawkish remarks from Federal Reserve (Fed) policymakers, and a series of weak bond auctions. However, a sharp reversal in the dollar index occurred on Thursday following downward revisions of Q1 GDP and core Personal Consumption Expenditures (PCE).
US GDP growth for Q1 was revised down to 1.3%, aligning with expectations, primarily because of slower consumer spending, while PCE prices rose slightly less than initially estimated. Additionally, US jobless claims were slightly higher than forecasts and above the 2024 average. Market participants now anticipate only one rate cut by the Fed this year, with a 65% chance of a decrease in November and 83% in December, compared to 61% and 80% respectively before the release of the US economic data. The dollar index fell below 105, erasing the previous day’s gains and mirroring the decline in bond yields.
Currency markets appear to be engaging in range-trading in this low-volatility environment as investors await further economic data to determine when the Fed might begin its easing cycle. Today's release of the monthly PCE report – the Fed’s preferred measure of inflation – is expected to be a pivotal event, likely setting the next significant trend for the dollar. If inflationary pressures from the first quarter persist, the trend could turn upwards.
In other news, Donald Trump was convicted on all 34 counts of falsifying business records in a landmark criminal trial in New York. This marks the first time a former or sitting US president has been convicted of a crime. The verdict comes as Trump campaigns to unseat Joe Biden in the November election. Sentencing is scheduled for July 11; while Trump could face prison, legal experts suggest a fine is more probable. Nonetheless, Trump remains eligible to run for president, as the Constitution does not disqualify convicted criminals from holding the office. However, this outcome poses significant political risks for his campaign.