Forex Today: The rally is finally here, and the Dollar knows it

During the Asian session, Australia released its April Home Loan data. The key report of the day will be the US Nonfarm Payroll. The US dollar remains under pressure amid falling expectations of a rate hike from the Fed and improvement in market sentiment.

Here is what you need to know on Friday, June 2:

On Thursday, US stocks rose amid an improvement in market sentiment, helped by Chinese data and the resolution of the debt-limit drama. The US dollar tumbled across the board as US yields dropped. Economic data from the US showed a still-vigorous labor market, a slowdown in inflation, and weak manufacturing activity. The mixed numbers led to an increase in bets of a Federal Reserve pause at the June meeting and rate cuts by year-end.

• US: ISM Manufacturing PMI drops to 46.9 in May vs. 47 expected
• US: Unit Labor Costs rise by 4.2% in Q1 vs. 6% expected
• US: Weekly Initial Jobless Claims rise to 232K vs. 235K expected

The US Dollar Index suffered its worst decline in months, falling from 104.50 to 103.50. The US 10-year yield dropped for the fifth consecutive day, settling at 1.59%, the lowest since May 18. On Friday, the May jobs report is due, with consensus pointing to an increase in payroll by 190K, compared to 253K in April. These numbers will be closely watched. Even a positive report may not help the Dollar if upbeat sentiment continues to prevail.

Nonfarm Payrolls Preview: Banks expect labor market to lose momentum only slowly

EUR/USD extended its rebound from monthly lows, breaking above 1.0750. Eurozone inflation numbers point to a slowdown in inflation. However, ECB President Lagarde said that more rate hikes are on the way.

A comment from Commerzbank Research:

Following the marked decline in energy prices, a correction is now also emerging in food prices, which had previously risen sharply. Even more important from the ECB's point of view, however, is the fact that underlying inflation has probably passed its peak. This supports our expectation that the ECB will raise key interest rates by 25 basis points for the last time in June.

The pound continues to be among the top performers of the week, with the Bank of England under pressure to do more to curb inflation in the UK. GBP/USD rose for the fourth consecutive day, posting the highest daily close since May 10 and trading comfortably above 1.2500.

The Japanese Yen performed well on Thursday, despite the rally in equities, driven by falling government bond yields. USD/JPY dropped for the third consecutive day, bottoming at 138.42; the pair so far lost 180 pips this week.

The weaker US dollar boosted AUD/USD and NZD/USD, with both pairs having their best day in weeks, rising to 0.6570 and 0.6070 respectively. In Australia, the Fair Work Commission (FWC) will announce the Annual Wage Review on Friday. 

USD/CAD tumbled more than a hundred pips, with the Loonie holding firm on the back of a rally in crude oil prices, which gained more than 3%. The pair bottomed at 1.3435, the lowest in two weeks.

Emerging market currencies rallied against the US Dollar, with the exception of the Turkish lira, which hit fresh record lows with USD/TRY rising above 20.80.

Cryptocurrencies failed to benefit from a weaker US Dollar and positive investor sentiment. Bitcoin lost ground, falling to $26,870, while Ethereum traded flat around $1,870. Gold rose again to the 20-day Simple Moving Average (SMA) around $1,980, and Silver soared, approaching $24.00.

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