Week Ahead: Dollar Well Bid Into NFP

26/05/2023

The dollar comeback has been strong over May. Indeed, with three solid weeks of gains, the DXY is closing in on levels last seen before the US banking blow-up. All that stress has seemingly been put aside as USD bulls aim for the March and year-to-date highs. Bets on Fed rate cuts have been reined in sharply with a year-end US interest rate now near to 5% and nowhere near the 4.25% level that had been discounted by the end of the year which was priced in early May. Markets also see that there is now more of a chance of 25bp rate hike at the June FOMC meeting, than the Fed pausing.

This huge shift in rate expectations, brought on by elevated inflation, a pending debt ceiling deal and a still-solid economy will be tested by the marquee US employment report released next Friday. The greenback’s stellar month is becoming slightly overbought, and attention will be focused on the wage growth numbers after their sharp jump last time. Is this the start of a sticky trend or will this widely watched data pull back? Revisions to the headline figure will also be checked as the original number consistently exceeds the estimate due to economists underestimating the strength of the labour market.

The euro has taken a fair brunt of the dollar upside pressure and is hoping the psychological 1.07 level in EUR/USD will help support it. Economic weakness appears to be slowly seeping into the German economy. But price pressures remain hot which could leave ECB policymakers in a bind. Markets are back to pricing more than two further rate hikes with the peak just below 3.75%. Focus next week will be on the inflation data for Germany and the region. Forecasts point to a cooldown in inflation, but the core measure could remain high and too high for the ECB. Any softness in the data would see the world’s most popular currency pair test that 1.07 mark.

Here are the main data points of the week: