USD higher amid dovish Draghi, focus on this week US data to gauge Fed’s next move

The US dollar rose across the board on Tuesday after a day off for US and UK investors. The Japanese yen was the only G10 currency that was able to keep its head above the water, thanks to solid April’s retail sales data (3.2%y/y versus 2.3% median forecast). The single currency accelerated its debasement amid dovish comment from Mario Draghi before the European Parliament. Yesterday, the president of the ECB made clear that the institution wasn’t ready to unwind its fiscal stimulus amid rising uncertainties on the inflationary outlook. Investors rushed into German bunds and sent yields to multi-week lows dragging the euro lower. The German 5-year yields slid to -0.44%, while the 2-year one fell to -0.72%.

After rallying strongly during the second half of May, EUR/USD came under pressure recently as investors have already discounted monetary tightening in the EU, while slowly pricing in the upcoming rate hike by the Federal Reserve. We anticipate further downside, with the 1.10 (psychological threshold and Fibonacci 38.2% on April-May rally) level as first target.

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However, our bullish outlook for the USD remains highly depend on the upcoming US data as the Fed needs a solid ground to lift borrowing costs consistently. The Fed’s favourite measure of inflation, the core personal expenditure, is due for release today and is expected to have eased to 1.5%y/y in April, down from 1.6% in March. Investors will also monitor closely developments in wage growth – will be released on Friday – as it could give a boost to inflation measures. On the other, the unemployment rate and NFP will most likely remain in the background as the recent impressive numbers fail to translate into higher salaries for US people.