Dollar dips, complex PCE next

We said on Monday here this would be a pivotal week and it certainly proved to be so. The US dollar steadily sold off on Thursday and was the worst performer; we will have a look at some of the reasons why. The New Zealand dollar led the ways as US equities hit a fresh record, but technology stocks faltered after a big miss from Amazon. Inflation will be back in focus on Friday with the PCE report due.

The post-Fed slump in the US dollar continued Thursday in a steady fall that is beginning to leave a sizeable mark on the charts, particularly in cable and EUR/USD.

What's difficult to ignore in GBP/USD is that the turn in the pair came almost precisely when the sharp turn in covid cases began. It's another data point that suggests virus worries are increasingly a factor.

A new framework argues there has been a shift in market thinking from rewarding a fast vaccine rollout toward rewarding higher levels of vaccination. Powell argued Wednesday that delta won't be a major US drag and that's probably correct but the emerging risk is the next variant and the countries with lower vaccination rates will be at a perpetually higher risk of a dire outcome.

Another thing to consider is sequencing. The combination of bottlenecks and reopening are hitting the US at the same time while in Europe the slower reopening will shift the overlap. This may have created illusory inflation in the US that's prompted a Fed reaction. The market may be looking beyond the bottlenecks and towards a time when the reopening boom fades just as those bottlenecks finally clear up. That should come around this time next year and will add disinflationary pressure.

Finally, it could be as simple as growth expectations adjusting. In the past 24 hours, we've seen US GDP undershoot and eurozone GDP beat.

The next hurdle will be the US PCE report. Headline inflation was at 3.9% previously and if that begins to flatten out or turn lower, then the dollar can continue its slide.