Beware of Data Development! US Dollar Trying to Find a Beat in the Market


On Tuesday, the US dollar struggled to determine direction as investors stuck to their views on the expected timing of monetary policy easing by the Federal Reserve this year.

Ether is poised for its biggest two-day gain in nearly two years and bitcoin is nearing record highs amid speculation about the outcome of an application for a US spot exchange-traded fund that would track the world's second-largest cryptocurrency.

The Euro strengthened 0.12% to $1.0869 before easing to trade at $1.085.

Investors are awaiting important data on Thursday including the European zone Purchasing Managers' Index (PMI) which could provide further clues about the monetary cycle in the European region. Meanwhile, with little US economic data on the calendar this week to guide the dollar's direction, investors' focus turned to the minutes of the FOMC meeting.

Some policymakers on Monday called for continued caution, even after data last week showed a decline in consumer price pressures in April.

Money markets now expect a 42 basis point (bps) rate cut by the Fed in 2024 which implies a 25 bps cut and a 68% chance of a second move by December. Policymakers expect a 63 bps ECB rate cut in 2024 from around 73 bps in mid-May.

Some analysts emphasized that the President of the Atlanta Fed, Raphael Bostic, made a positive statement for the US dollar when he warned that the Fed's benchmark rate may end up at a higher fixed rate than in the past decade.

"We expect the US dollar to weaken after the first rate cut (by the Fed), which the market now expects in September, but we also see the risk of a delay in monetary easing with the Fed making the first move in December," said Athanasios Vamvakidis, global head of strategy forex at BofA.

The US dollar index, which measures the US dollar against six major currencies, traded up 0.05% to 104.51.

On data, the focus will now be on the Personal Consumption Price Index (PCE) report of the Fed's preferred measure of inflation due out on May 31.

In the crypto market, Ethereum jumped 6.2% to $3,785.60 after reaching $3,730.70, its highest level since March 16. It rose nearly 14% in the previous session, the biggest daily percentage gain since November 2022.

Bitcoin breached the $70,000 mark and last traded 2% higher at $71,128. It hit an all-time high of $73,803.25 in March.

The surge in cryptocurrencies was also "related to last week's (US) core inflation data which boosted risk sentiment and clearly brought back rate cuts in options," said Tony Sycamore, market analyst at IG.

Against the yen, the US dollar slipped 0.06% to 156.20, not far from its lowest level in more than 30 years at around 160.

Fears of intervention from Japanese authorities prevented traders from pushing the yen to new lows. However, the still pronounced interest rate differential between the US and Japan maintains the yen's attractiveness as a funding currency.

The US dollar strengthened against the Canadian currency after inflation data was released. The BoC is expected to cut interest rates three times before the Fed's first move, according to a Reuters poll.