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Greenback Falters as Markets Wary of CPI Surprise

FOREX
  • The greenback trades poorly on the day, with the USD Index lower for a third consecutive session. The 50-dma provided solid support for the index earlier in May, and this week's weakness points to another imminent test - crossing at 104.775 today.
  • Pre-positioning ahead of US CPI remains key, with markets wary of an out-of-consensus print following the volatile PPI release on Tuesday. Markets expect Y/Y core inflation to slow to a new post-pandemic low of 3.6%, and the determinants of PCE will come under particular scrutiny for gauging any Fed policy response.
  • NOK trades well, outperforming all others in G10 and aiding a slide below the 50-dma of 10.8053 in USD/NOK to touch a new May low. China easing rhetoric has picked up, with risk proxy currencies being the main beneficiary. Reports overnight suggested that Chinese local governments will be empowered to buy up unsold housing inventories - the latest sign that the authorities could be becoming more activist in underpinning the economy.
  • ECB speak so far Wednesday has stuck to the party line - with Villeroy, Rehn and Muller unsurprisingly pointing to a June rate cut - but with less commitment to policy direction beyond that point. EUR is softer against most others, but continues to hold the bulk of the recent rally. EUR/GBP consolidates just below the 200-dma of 0.8605.
  • Outside of the US inflation print, retail sales for April also cross - seen slowing across all main metrics and in particular the ex-autos category. Fed's Barr, Kashkari and Bowman are also set to speak.
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