Dollar Index Rises, Focus Shifts to Upcoming CPI and Retail Sales Reports

On May 8, the dollar index rose by 0.15%, driven by a series of economic data and market dynamics. The EUR/USD pair was down 0.1%, hovering above Wednesday’s lows, which had erased the rally triggered by Friday’s dovish U.S. data. As the market’s focus shifts to the May 15 CPI and retail sales reports, the yen continued to slide broadly.

EUR/USD Movement and Treasury Yield Influence

The EUR/USD pair only briefly recovered from Wednesday’s low of 1.0735, influenced by the 50% Fibonacci retracement of last week’s rally and other nearby supports, moving in line with bund-Treasury yield spreads. The dollar was broadly higher earlier in the day as the correction continued from the Treasury yield-led drop following Friday’s dovish U.S. jobs and ISM reports, with the exception of the yield-bereft yen.

Anticipation of May 15 CPI and Retail Sales Data

The durability of the dollar’s correction will be tested by the upcoming May 15 CPI and retail sales data. Currently, the market expects the Federal Reserve to cut rates in September and December, while the European Central Bank (ECB) is anticipated to begin easing next month, with three cuts projected by year-end. These outlooks have not been significantly influenced by this week’s second-tier economic data.

Fed and ECB Outlook

Federal Reserve Governor’s comments on the financial health of households, banks, and firms may have contributed to a late firming of Treasury yields and the dollar. On Wednesday, the market reaction followed the Swiss National Bank’s recent move, which is seen as setting the stage for the ECB to also ease. The pace of easing in Europe will be influenced by the pace of Fed cuts, as too much policy divergence could lead to dollar gains and European import price inflation.

Yen Performance and Market Concerns

The yen rose by 0.58%, extending its recovery from last week’s significant drop due to suspected Ministry of Finance (MoF) interventions, which culminated with Friday’s weak U.S. data. Prices are now nearing the mid-point of that plunge at 156.05. There is concern that the yen may be supported again if it falls toward last week’s peak, but the 20 basis points of further Bank of Japan (BoJ) rate hikes priced in by year-end have not shifted amid hints that the BoJ might have to take more responsibility for supporting the yen alongside the MoF.

Pound Sterling and Bank of England Outlook

The pound sterling fell by 0.1% ahead of Thursday’s Bank of England (BoE) meeting, which is widely expected to leave rates unchanged. The focus will be on whether there are more votes for rate cuts and from whom. Markets currently fully price in a first BoE rate cut in August and one more before year-end. Wednesday’s sterling low of 1.2469 nearly retraced 50% of the April-May rebound, as Gilts-Treasury yield spreads diverged bearishly from Friday’s high, and gains linked to risk-on flows faltered this week.

Australian Dollar and RBA Influence

The Australian dollar fell by 0.33%, extending its pullback from May, April, and March highs near 0.6650. This decline follows another Reserve Bank of Australia (RBA) hold and softer Australian retail sales data.

Upcoming U.S. Jobless Claims Report

Looking ahead, U.S. jobless claims on Thursday will provide a near real-time gauge of the labor market’s condition, which appeared to cool in last week’s payrolls and JOLTS reports.