Forex Today: Dollar loses momentum, markets remain cautious

The final PMIs from Australia and Japan, Q1 Australian Capital Expenditure, and the Chinese Caixin Manufacturing PMI are the highlights of the Asian session. Markets remain cautious, awaiting a positive resolution to the US debt-ceiling drama. Later on Thursday, US employment data will be watched closely ahead of Friday's Nonfarm Payrolls report.

Here is what you need to know on Thursday, June 1:

Wall Street indexes lost ground again on Wednesday as markets remain cautious. Equity prices finished off their lows. The rebound in stocks weighed on the US Dollar, which was also affected by comments from Federal Reserve officials that signaled a preference for a pause at the next FOMC meeting. A positive outcome of the debt-limit drama is expected from the ongoing debate in the US Congress.

Analysts at Brown Brother Harriman wrote: 

We believe passage of the deal leaves the door wide open for a 25 bp hike at the June 13-14 FOMC meeting.  With banking sector stresses fading, a potential default was the only thing that could have prevented a hike next month.  That said, the decision will ultimately depend on the data between now and that meeting, starting with the jobs report this Friday.

US employment data (JOLTS report) kept the door open to another rate hike. The ADP employment report and the weekly Jobless Claims will be watched closely on Thursday. The key report will be on Friday with Nonfarm Payrolls. The Beige Book indicated that "economic activity was little changed overall in April and early May".

The US Dollar Index (DXY) rose 0.15% on Wednesday, ending far from its peak. The DXY hit a two-month high at 104.70 and then pulled back to 104.20.

Inflation data from Germany and France showed a decline in annual rates. On Thursday, the same is expected from the Eurozone Consumer Price Index (CPI). The Euro weakened following inflation figures. Market participants and European Central Bank (ECB) officials still expect rate hikes, but tightened expectations eased. The EUR/USD bottomed at 1.0630 and then rebounded, driven by a broad-based correction of the US Dollar. The pair bounced towards 1.0700. The trend is down, but the bearish momentum has waned.

The Pound continues to perform well as more rate hikes are expected from the Bank of England to curb inflation. GBP/USD finished at a daily high after erasing losses, climbing toward 1.2450. EUR/GBP accelerated to the downside, falling for the fourth consecutive day. The cross closed below 0.8600, the weakest since December.

USD/JPY dropped for the third consecutive day, falling below 139.50. Lower government bond yields in Europe and the US continue to support the Japanese Yen. Additionally, comments from Japanese officials regarding Yen's strength are helping the currency.

The Australian Dollar did not benefit from higher-than-expected inflation in Australia, nor Reserve Bank of Australia Governor Lowe's comments suggesting that rates could rise further. AUD/USD finished practically flat, hovering around 0.6500, after reaching fresh six-month lows at 0.6456.

NZD/USD trimmed losses during the American session and rose above 0.6000 after trading under that area for the first time since mid-November.

During the American session, the Canadian Dollar outperformed, supported by better-than-expected Canadian data. Real Gross Domestic Product grew at an annual rate of 3.1% in Q1, surpassing the expected 2.5% and recovering from a 0.1% contraction in Q4.  April advance GDP rose 0.2%. Those numbers increased the odds of a rate hike from the Bank of Canada next week. USD/CAD posted the lowest close in a week, around 1.3570. Again, the pair ran into resistance at the 1.3650 area. The short-term outlook is starting to favor the downside.

The Turkish Lira was again the worst performer as it depreciated after Erdogan's victory in the presidential elections. USD/TRY reached new record highs above 20.70. A week ago, it was trading at 19.70.

Gold rose moderately on lower yields but pulled back to $1,960 after reaching $1,974. Silver rose to its highest in a week, above $23.50. Cryptocurrencies lost ground, with BTC/USD falling 2.35% to $27,120. Crude oil prices continued to trend lower, affected by the gloomy economic outlook, losing more than 2%.