US Dollar Likely To Pare Recent Gains Amid Disappointing PMI Data And An Escalating Trade War
The week ended Friday 24 has been frustrating to investors as the forex market faced headwinds from all directions. To be sure, the Pound Sterling is facing pressure from the latest twist in Brexit debacle while the Euro is facing an election fever. On the hand, the US dollar is in the thick of downward pressure as the trade war bits.
Disappointing PMI data
Bets on the US dollar are likely to get defensive given that the latest PMI data points to an ailing economy. To be sure, the PMI data for May came out, and it was clear that the services and manufacturing sectors are not doing well. In particular, the data showed that the consumer output index was 50.9, compared to 53 registered in April. Notably, the figure indicates that business activity in the U.S. expanded slowest since 2009.
Manufacturing output alone registered a growth of 50.8 in May while it grew at 52.7 the previous month. The Institute of Supply Management (ISM) will publish another round of PMI data in June, and investors will be looking forward to improvement. In March, data from ISM showed that PMI was at 55.3 but fell substantially to register 52.8 in April.
The dollar is facing strong headwinds
As per the PMI data, the economy is still expanding but at a slow pace. Following the report, the bears were out on Friday as the greenback slid from two-year highs. Notably, the dollar plunged 0.2% against a basket of six major rivals settling at 97.686. In the previous trading session, the US dollar index had closed at 98.371; a figure was last seen two years ago.
Analysts believe that the trade war could be the single most important driver of the US dollar, considering that the economic data is disappointing. Specifically, the U.S. blacklisting of Huawei mostly affected Asian assets and somehow distorted sentiment in the US economy.
An escalating trade war could hurt the greenback more
Nonetheless, the greenback could get a beating from the dovish bets for a rate cut. In particular, traders are waiting for PCE inflation gauge, which the Fed relies on a lot while making rate cut decisions. Projections about the PCE inflation gauge place core price growth at 1.6% on-year. If the projection comes out correct, the price growth will be at a 19-month low. In this backdrop, the dollar might weaken further.
Also, the direction of the trade war is crucial. On Thursday, May 23, the Japanese Yen and the Swiss franc rallied, which is an indication of weakening risk sentiment. Notably, the USD/JPY pair lost 0.65% of its value marking the largest such drop in two months. Specifically, this could be an indication that traders are getting worried about the escalating trade war between the U.S. and China. Notably, China has shown its resilience against backing down to U.S. pressure even after blacklisting its most valuable global brand, Huawei.