Dollar forecast to stabilize amid mixed economic signals

Dollar forecast to stabilize amid mixed economic signals — The U.S. dollar is expected to stabilize in the coming weeks after recent economic data showed mixed signals about the strength of the American economy. Following a period of volatility, analysts at ING now anticipate a quieter trading environment with low volatility until more substantial data is released.

Recent inflation figures have shown a slight deceleration, with core CPI increasing by 0.3% month-on-month, marking the first slowdown in six months. Conversely, retail sales in April did not show any growth, fueling speculation that U.S. economic momentum may be waning. Despite these indicators, the Federal Reserve’s persistent concerns about inflation suggest that interest rates are likely to remain higher for an extended period.

Comments from Federal Open Market Committee (FOMC) members following the CPI release reflect a cautious stance towards monetary policy. Hawkish FOMC member Neel Kashkari emphasized the possibility that current policy might not be sufficiently tight, while Austan Goolsbee, with a typically dovish lean, acknowledged that further efforts are needed to achieve disinflation.

Market expectations have shifted, with predictions now favoring two rate cuts within the year, a sentiment not seen in the past month. This outlook is more optimistic than some analysts who foresee a more dovish trajectory, with three rate cuts starting in September 2024. However, these expectations hinge on upcoming economic releases, such as core PCE data due on May 31 and early June’s employment figures, which may support a dovish narrative if they align with current trends.

The yen’s recent rally may be short-lived, as disappointing Japanese growth figures have emerged, contributing to a loss of momentum for the currency. In a market environment characterized by low volatility, carry trades are expected to become a preferred strategy among investors. The dollar, particularly against low-yielding currencies like the yen, is anticipated to find stability in the 104/105 range.

Today’s U.S. economic calendar features jobless claims, April housing starts, and the Philadelphia Fed Business Outlook index. These releases, along with speeches from Fed officials such as Raphael Bostic, Loretta Mester, and Thomas Barkin, could influence market sentiment. Additionally, retail sales and industrial production data from China will be closely watched as they may set the tone for the market heading into the weekend.

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