USD: Dovish momentum re-emerging – ING

This week’s data flow has been quite dovish for the Federal Reserve. After the soft April CPI, PPI dropped by 0.5% month-on-month, against expectations of a 0.2% rise, with significant upward revisions for March data. Regarding year-on-year levels, headline PPI decreased from 3.4% to 2.4%, while core PPI fell from 4% to 3.1%. Retail sales increased by 0.1% MoM, slightly above the consensus of 0.0%. However, the control group, which excludes volatile items like gasoline, autos, and building materials, showed a decline of 0.2% MoM, against expectations of a 0.3% increase, ING's FX analyst Francesco Pesole notes.

Risks remain skewed to the downside for DXY

"The USD OIS 2Y swap rate has adjusted 10bp lower from the 3.8% peak, but does not seem to be taking the dovish signals from data at face value given the tariff distortion, and pricing for a Fed cut before September remains below 50%. The dollar short-term rates relationship has loosened in the past two months, but the market’s bearish USD tendency means further dovish repricing could prove to be the catalyst for fresh dollar short building."

"There aren’t any tier-one data releases in the US today. Housing starts are expected to have increased in April, while import prices should have dropped on the back of lower oil prices. The University of Michigan surveys have some FX impact potential, especially when it comes to inflation expectations. The median response for the expected change in prices over the next year spiked from 2.8% in December to 6.5% in April. Markets are understandably treating these figures with caution: the sample size is only 500 households, and some political bias in the responses may be skewing the result."

"This week’s price action suggests waning momentum for the dollar to close its lingering risk premium. The c as strategic dollar shorts remain prevalent, and the 100.0 support could be retested sooner rather than later."