HomeContributorsFundamental AnalysisDollar Faces Downside Risks from Upcoming Inflation Data

Dollar Faces Downside Risks from Upcoming Inflation Data

The second estimate of US GDP for Q1 will hit the markets on Wednesday while the Fed’s preferred inflation gauge for April is due on Friday, both at 12:30 GMT. Investors may focus mainly on the PCE inflation numbers, where risks seem tilted towards a disappointment relative to forecasts. If so, that could fuel speculation for a more cautious tone at the Fed’s June 19 meeting and thereby, weigh on the dollar.

Although still solid by most metrics, the US economy has lost some of its shine lately, with inflationary pressures in particular cooling down. Not just current inflation, but 5-year breakeven inflation expectations have also dropped quite substantially – something that will likely worry the Fed as it poses downside risks for future inflation. Part of that has to do with the trade war, as investors extrapolate that a prolonged conflict will hurt growth and by extent, inflation too.

Against this backdrop, market bets for Fed rate cuts have soared. A quarter-point cut by December is now fully priced in according to the Fed funds futures, with traders also assigning a ~25% chance for a second one. Yet, the Fed has remained neutral until now, providing no signals for cuts – though that could change at the June meeting if incoming data deteriorate further.

In this sense, the second reading of GDP for Q1 on Wednesday is unlikely to provide much excitement, with forecasts pointing to a slight downward revision to a 3.1% annualized growth rate, from 3.2% previously. Probably more important will be Friday’s core PCE inflation numbers for April. Expectations are for the yearly rate to hold steady at 1.6%, but the risks surrounding that forecast seem tilted towards a disappointment.

The core CPI rate for April ticked up, but digging through the details, that was owed to strong gains in the ‘shelter’ component that measures rents – which is not included in the core PCE. The segments measuring goods inflation were soft. Separately, the Markit services PMI for the month noted weakening inflationary pressures, with firms raising their prices at the slowest pace in 18 months. Not to mention that the actual PCE print stands at 1.553%, and has been rounded up to 1.6%, meaning that even a slight miss could drag it down to 1.5%.

Personal income and consumption data for April will be released alongside the PCE print.

If this week’s PCE print is indeed weaker than expected, that could raise the odds for a more cautious-sounding bias at the next Fed meeting, and consequently weigh on the dollar a little. That said, the ‘real test’ will probably come next week, when the jobs report and ISM PMIs for May are released.

Taking a technical look at euro/dollar, initial resistance to advances may be found at 1.1215, the May 27 high, with an upside violation opening the way for the May 13 peak of 1.1265.

On the downside, another wave lower could stall at the 2-year low of 1.1105, where a bearish break would turn the short-term bias back to negative, shifting the focus to the 1.1020 zone.

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