Investors Expect the Dollar to Strengthen Further

The U.S. Dollar index (DXY) has dipped by 0.2% to 105.68 points this week. Meanwhile, the EURUSD has climbed by 0.4% to 1.06950, marking its highest level since April 12. Other major commodity-driven currencies, including the Aussie, Kiwi, and Loonie, have also strengthened by 0.3% against the Greenback. Asian currencies such as the Yen and Yuan have largely remained neutral in relation to the Dollar.

The currency market is undergoing a corrective phase following a recent 1.5% rally of the Greenback. However, this correction does not alter the overall short-term outlook for the market. U.S. 10-year Treasuries yields have risen to 4.66% from 4.51% after Federal Reserve (Fed) officials emphasized concerns about persistent inflation, which could potentially deter the Fed from implementing interest rate cuts this year. Chicago Federal Reserve (Fed) President Austan Gooldsbee clarified that the Fed's policy stance remains unchanged due to stagnant progress on inflation. Consequently, the Fed is adopting a wait-and-see approach until there is greater clarity on inflation trends. Market sentiment appears to support the scenario of a stronger Dollar, speculating that the European Central Bank (ECB) and Bank of England (BoE) may be inclined to cut rates first this summer.

The WisdomTree Bloomberg U.S. Bullish Fund (USDU) has reported net capital inflows of $41.2 million for the week, marking the largest single-week net inflow since April 2023. These developments are anticipated to bolster the American currency by the conclusion of spring, barring any significant macroeconomic disruptions or market corrections. Some investors are betting on a potential stock market correction in May.

In terms of upcoming macroeconomic data releases, the focus will be on the latter half of the week, with the first estimate of Q1 2024 GDP scheduled for Thursday and the PCE index set to be released on Friday. Consensus estimates suggest that GDP growth may decelerate to 2.5% QoQ from the previous 3.4%. However, Atlanta Fed GDPNow modelling forecasts a slightly milder slowdown to 2.9% QoQ. Analysts anticipate the headline PCE index to increase to 2.6% YoY, up from the previously recorded 2.5%, while the core PCE, excluding volatile food and energy prices, may decline to 2.6% YoY from 2.8% YoY. This scenario implies a potential strengthening of the Greenback to 1.05600-1.05800 against the Euro. However, a deeper decline below 1.05000 cannot be ruled out if the PCE exceeds consensus expectations.