The Fed's interest rate cut expectations have risen sharply, and the US dollar index is under pressure

On Friday, the US dollar index hovered above the 100 mark. This trading day will usher in the initial value of the University of Michigan Consumer Confidence Index in May, the monthly rate of the import price index in April, the initial value of the total annualized construction licenses in the United States, and the total annualized number of new homes in April. Investors need to pay attention. In addition, we need to continue to pay attention to talks between Ukraine and Russia and pay attention to the news about US President Trump.

Analysis of major currencies

United States dollar: As of press time, the US dollar index hovered around 100.64, down 0.17% during the day. The dollar index may continue to face selling pressure as weak inflation data reduces the possibility of the Fed rate hike and Powell’s warnings complicate policy outlook. With safe-haven funds flowing to the yen and Swiss francs and capital shifting to non-dollar assets, traders may still be reluctant to rebuild long positions in the U.S. dollar. Technically, the market faces resistance at the key point of 101.302 and the 50-day moving average of 101.800. Before breaking through these levels, the dollar index has the least downward resistance, with the next target of 99.391.

Euro: As of press time, the euro/dollar hovered around 1.1202. The euro/dollar fluctuated violently on Thursday, briefly falling below the 50-day index moving average (EMA) and hit the 1.1000 level for the second time in a week. eveningThe rebound pushed Fiber's buying back to the level at the beginning of the trading day, close to the 1.1200 mark. Technically, Thursday's repeated volatility chart movements put Fiber on the horizon to continue its stable downward trend; bullish momentum is still supporting the euro/dollar above the key technical level. However, the pair's slow and steady downward trend since approaching the high of the 1.1600 mark at the end of April remains difficult to ignore.

GBP: As of press time, GBP/USD hovered around 1.3313, and GBP/USD turned down on Thursday, cutting several points to stay within the short-term consolidation range slightly south of 1.3300, as the market more or less got the results they wanted in the release of economic data for the London and US market periods. Both the UK gross domestic product (GDP) and the US producer price index (PPI) inflation exceed market expectations, preventing excessive fluctuations in any direction. Technically, the pound/USD price trend is still stubbornly staying in the oscillating range near the 1.3300 mark. Since the decline from 1.3445 in early April, buying has never been able to break through this key price level again, but bullish pressure remains strong enough to prevent prices from falling below the 50-day index moving average (EMA) near 1.3110.

Summary of news from the foreign exchange market

1. Economic data collapsed in a total manner: expectations of Fed rate cuts have heated up sharply

" Thursday's data created greater space for the Fed's interest rate cuts, and the market formed more dovish expectations." This sentence by Peter Grant, vice president and senior metals strategist at ZanerMetals, revealed the first key driver of the surge in gold. The US economic data for April released on Thursday was "annihilated": the producer price index (PPI) unexpectedly fell by 0.5%, far lower than expected growth of 0.2%, retail sales growth fell from 1.7% in March to 0.1%; manufacturing output fell by 0.4%, far exceeding the expected 0.2% decline. This series of data directly led to violent fluctuations in the US bond market. The 10-year U.S. Treasury yield plummeted 11 basis points to 4.435% on Thursday, the largest single-day drop since March 28; the 2-year yield, which is more sensitive to interest rates, fell by 9.2 basis points to 3.961%. The bond market is voting with real money - an economic slowdown is a foregone conclusion.

2. Japan's economy shrank for the first time in a year, net trade drag coupled with weak consumption

Japan's first quarter real GDP annualized quarterly rate recorded -0.7%, indicating that Japan's economy shrank for the first time in a year. Even before it has yet to bear the impact of Trump's tariff measures, its vulnerability has been revealed.. After a sharp boost in the previous quarter, a decline in exports and a surge in imports have caused net trade to drag the economy in the first three months of this year. Consumer spending, which accounts for about half of the total economy, remained basically the same, while consumption remained lower than pre-epidemic levels as inflation weakened its purchasing power. The shrinkage could also spark ongoing political debate about whether tax cuts or cash subsidies need to be implemented before the Senate election this summer.

3. Fed Barr: Supply chain disruptions may lead to higher inflation

Fed Barr said that the U.S. economic foundation is solid, but he warned that tariff-related supply chain disruptions may lead to slowing economic growth and rising inflation. Barr stressed the importance of small businesses and their role in supply chains and in the overall economy. He said trade policy cast a shadow on the outlook and added uncertainty. Potential supply chain disruptions are “especially severe” for small businesses, partly because they have fewer opportunities to obtain credit. He added that small businesses often provide professional inputs that are not readily available from elsewhere, and business failures can further disrupt supply chains.

4. The negative impact of tariffs may surface in the United States. Colin Graham, head of multi-asset strategy at Robeco, said in a report that the harmful effects of tariffs may become obvious in the United States. Recent data released do not fully reflect the impact of tariffs. There is evidence that American consumers are driving spending ahead of schedule and companies are already stocking up before tariffs arrive. In due course, the overall impact “will begin to show up.”

5. The core inflation indicators favored by the Federal Reserve in April are expected to improve

The core inflation indicators favored by the Federal Reserve may fall to their lowest level since 2021 in April data. Panson Macro and Capito macroeconomics estimate that excluding volatile food and energy prices, the core PCE annual rate may drop from 2.6% in March to 2.5% in April. This will be the lowest level since March 2021, just before the pandemic-era inflation surge really begins.

Institutional View

1. Strategist: The weak dollar is a sign of cross-border investor flows

NeubergerBerman's strategist said in a report that the recent weakening of the dollar seems to be a sign of cross-border investor flows. "These capital flows are likely to be related to the prospect of a slowdown in U.S. economic growth, but may also coincide with the recovery of U.S. risky assets." U.S. risky assets rose as U.S. dollar investors turned back to the stock market from Treasury bonds. However, if non-dollar investors take greater risks while staying away from the U.S. market, there will be no funds back into the U.S. dollar assets. This means U.S. stocks are up, but the dollar remains weak. NeubergerBerman expects the dollar to fall further 3%-5% against the euro and yen this year, but volatility is expected to increase.

2. Mitsubishi UF: Pound responds cautiously to strong UK GDP data

3Derek Halpenny, an analyst at LinguoFang, said in a report that the pound responded to the improvement of UK economic growth data, indicating that the interpretation of these data is cautious. The data showed that the UK's economy grew by 0.7% in the first quarter, but this was driven by instability in corporate investment. This could mean investors will remain cautious about their over-interpretation of the first-quarter data. In view of the tariff measures announced in April, the Bank of England saw the risk of slowing economic growth and should further cut interest rates.

3. Deutsche Bank: The Federal Reserve may not cut interest rates until December

Analysts at the Deutsche Bank Research Center said in a report that the Federal Reserve may keep the policy interest rate unchanged before the December rate cut and then further relax policies next year. "Our basic assumption remains that the next rate cut is in December, followed by two more rate cuts in the first quarter of 2026, at 25 basis points each." Analysts said the easing of tensions between China and the United States reduced the risk of further deterioration of the U.S. labor market, but other tariff measures could keep inflation at unset levels.

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