The U.S. Dollar is strengthening this morning as a result of a negative market reaction to data releases earlier highlighting first-quarter production and inflation.
Overview
Gross Domestic Product for Q1 came in at 1.6% instead of the expected 2.5% pace. Personal Consumption also came in lower than forecast. What did remain up, however, was core inflation, as both the GDP Price Index and the Core Personal Consumption Expenditures Price Index revealed more advancement than the estimates. At 3.7% for PCE vs. 3.4%, it is clear that this year, the progress that had been made against prices climbing has faded, and from a bigger picture perspective, we may be producing less, but it is quite expensive to do so.
The risk is that now you may start having headlines featuring the concept of “stagflation,” when an economy shows signs of stagnating while prices remain elevated without reprieve. Already, equities are getting hit, and currencies such as the Mexican Peso are down by 1.5% in the session. The Japanese Yen is at its weakest since 1987. More data will close out the week tomorrow in the form of Personal Income and PCE Deflator for March while also gauging confidence with April’s responses to the University of Michigan Consumer Sentiment survey. For now, the Buck is getting close to returning to levels not seen since November, as seen in previous weeks.
What to Watch Today…
- US Q1 GDP, Thursday 8:30 AM
- Monex USA Online is always open.
EUR ⇓
The Euro has failed to mount its comeback following data in the U.S. demonstrating that price pressures may give enough room for the Fed to maintain its “hawkish” stance. Meanwhile, the gap between the odds of cuts between the Fed and the European Central Bank has only exacerbated. Chances that the ECB commits to interest-rate reductions starting at their June 6th meeting stand at 83.0% while traders are only pricing in a cut by the Fed for December. June odds are now less than 9.0% for Fed cuts. Expect Euro-zone inflation and productivity measures such as Purchasing Managers Index to affect FX flows mid next week.
GBP ⇓
The Pound has not had a big move overnight, but slowly and gradually has gotten away from its November low point. April Retail Sales figures showed a decline after having seen growth the month prior. Data has not been painting a pretty picture for the U.K., but traders seem convinced that the Bank of England will be less inclined than their ECB counterparts. In fact, BOE Governor Andrew Bailey has stated how traders are betting the wrong way since BOE has less inflationary concerns than the Fed does to maintain borrowing costs high. Regardless, chances of a BOE cut stand at less than 30.0% for their June 20th meeting.
