On May 9, the US markets saw a notable reversal of early losses. Initially, the market dipped to levels last seen before the US jobs data release last Friday. However, by the end of the day, the market had climbed by 0.25%. This shift was primarily driven by a significant rise in initial jobless claims, which hit their highest level since August 2023. This data exerted downward pressure on Treasury yields and the US dollar.

Looking forward, all eyes are on the upcoming US Consumer Price Index (CPI) and retail sales reports, which are scheduled for release on May 15. These reports are anticipated to provide further insights into the state of the economy and influence market movements.

The dollar index fell by 0.25%. Sterling, which initially dropped to an 11-day low of 1.2446 post-Bank of England (BoE) meeting, managed to recover. This initial decline was due to an increase in votes for a rate cut from one to two members of the BoE, with Governor Andrew Bailey suggesting that the BoE might need to ease monetary policy more than expected, potentially starting at the next Monetary Policy Committee (MPC) announcement on June 20.

Despite this dovish outlook, sterling rebounded as the market priced in less than a 50% probability of a June rate cut, with slightly more than two rate reductions expected by the end of the year. The rebound was largely catalyzed by the unexpectedly large rise in US jobless claims, coupled with last week’s modest 0.2% rise in average hourly earnings and a three-year low in job openings.

Markets are currently grappling with mixed signals from recent economic data. Last week’s Institute for Supply Management (ISM) indexes indicated recessionary conditions, despite sharp rises in their prices paid indexes. This has led to a complex economic landscape that investors are trying to navigate.

On Thursday, Treasury yields fell by roughly 3 basis points across 2- to 10-year tenors, as investors awaited next week’s critical CPI and retail sales reports. The cooling US economic data has reduced concerns over aggressive Federal Reserve tightening, fostering a greater risk-on sentiment. This shift has benefited risk-sensitive currencies like the pound and the Australian dollar, the latter of which rose by 0.5%.

The euro edged higher, supported by a bullish key day reversal and a bullish engulfing candlestick pattern in EUR/USD, which favored the euro despite the slightly dovish BoE event. Meanwhile, the yen’s rapid recovery from last week’s collapse stalled on Thursday after nearly retracing half of its losses. The jobless claims report pulled the yen back to near flat.

Treasury yields and Federal Reserve expectations continue to be the primary drivers of USD/JPY movements. Last week’s suspected yen buying by Japan was used as a discount opportunity for carry traders and Japanese importers. Although Japan’s Ministry of Finance has reiterated its readiness to intervene to prevent excessive yen depreciation, such intervention seems more likely near last week’s high of 160.245, close to the 1990’s peak of 160.35.

As the markets continue to react to these developments, the upcoming economic reports will be crucial in shaping the direction of both the US economy and global financial markets.