Evidence of “twin peak” adds up to dollar strength – Danske Bank

Last week, the global manufacturing PMI posted the first decline since 2020. For FX, it will be the link from peak growth to inflation, which matters. PMIs are likely to taper off further, US jobs to strengthen and cross-asset pricing are set to leave the reflation theme behind. This adds up to more dollar strength, in the opinion of economists at Danske Bank.

Global manufacturing PMI post first decline since May of 2020

“Last week, global PMIs posted their first decline since 2020. This brings markets closer to our expectation of a ‘twin peak’ in activity and inflation indicators. US payrolls were fine but not particularly surprising and it may be a few months before we see the large catch-up. Performance in the technology sector is a boon for the dollar.”

“FX as an asset class is more concerned with inflation and the market’s perception of such risk. In our view, peak PMI will likely also imply peak inflation. The stronger dollar & weaker Scandies are well in line with this, among many other cross-asset moves.”

“PMIs are likely to taper off further over the coming quarters, US jobs to post a very strong showing in Q3/Q4 as re-opening continues and cross-asset pricing is leaving the reflation theme behind as the curve flattens, inflation expectations settle down and equities push towards the tech-like sector(s).”

“In short, the data and markets are increasingly in line with our call for EUR/USD towards 1.15 in 12M and amid so, weaker Scandies.”