US Dollar May Rise as Fed Outlook Firms, Euro to Look Past PMI Data

The US Dollar may rise as upbeat news-flow fuels a recover in Fed interest rate hike expectations. The Euro may not find follow-through in June’s Eurozone PMI data.

Talking Points:

• Upbeat US News-Flow May Rekindle Fed Rate Hike Bets, Boost US Dollar

• Euro Unlikely to Find Follow-Through in June’s Flash Eurozone PMI Data

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The US Dollar outperformed in overnight trade, rising as much as 0.3 percent on average against its top counterparts. The move tracked a pickup in front-end US bond yields, hinting a firming policy outlook may have driven the move. A marginal improvement in Fed rate-hike expectations may have followed better-than-expected Existing Home Sales figures. Purchases amounted to 5.35 million in May, the most since November 2009.

June’s preliminary set of Eurozone PMI figures headlines the economic calendar in European trading hours. The regional composite gauge is expected to edge slightly lower to 53.5 from 53.6 last month. Economic news-flow out of the currency bloc has deteriorated relative to consensus forecasts over recent weeks, opening the door for a downside surprise. Significant follow-through from the Euro seems unlikely however considering the data’s limited implications for near-term ECB monetary policy. The central bank looks to be effectively on auto-pilot as it continues to implement its €60 billion/month QE effort.

Later in the day, May’s US Durable Goods Orders and New Home Sales releases enter the spotlight. Realized US data outcomes have notably improved relative to consensus forecasts since mid-May, opening the door for another set of upside surprises. Such outcomes may further boost the greenback as markets revisit their expectations for the likely timeline of Fed tightening.

Last week, Chair Janet Yellen and company signaled their baseline normalization outlook had flattened somewhat compared with the March forecast, which markets interpreted as dovish. However, policymakers also called for two rate hikes in 2015, which seemed to pass below the radar for most investors. If realized, this forecast would amount to a significant hawkish surprise relative to the current priced-in outlook that envisions a single rate hike in December.