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[MARKET ANALYSIS] USD weighs hawkish FOMC and Geopolitics, EUR chops on dire French/mild EZ PMIs

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[MARKET ANALYSIS] USD weighs hawkish FOMC and Geopolitics, EUR chops on dire French/mild EZ PMIs

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  • The Dollar index is unchanged on the day and returns to Thursday’s lows around 99.00 after chopping on geopolitics and soft EZ/French data.
  • On Wednesday, hawkish FOMC minutes were overshadowed by geopolitical optimism, with the greenback completing the session 0.4% off highs. FOMC Minutes: More hawkish than expected, with the majority of members saying “further tightening would likely become appropriate if inflation remained persistently above target….. many preferred to remove the easing bias from the policy statement”. Hawkish price action was faded by large USD/crude/yield moves on Pakistan Mediation/Trump comments, but it appears the narrative this morning is of poor EZ data + hawkish FOMC minutes, a perfect storm for USD strength. However, geopolitics remains the driver with continued constructive reports emerging from the Gulf. ING writes, “the macro background is also making it harder to aggressively bet on the USD downside.”
  • EUR saw decent weakness on dismal French data, which heightened the possibility of EZ-US differentials widening. French PMIs marked the steepest contraction since late 2020. Services and composite were expected to be broadly unchanged from priors, though both slipped significantly further into contraction territory. The Manufacturing picture was better, though the metric still fell into contraction. The EZ figure was also poor but provided some reprieve for the single currency. EZ Manufacturing was resilient, though still fell below expected and previous, while composite and services fell further into contraction. As the French series was released, EUR/USD saw a move c.24 pips lower to a 1.1594 trough, though pared some downside as German/EZ figures were not as bad as feared according to the indications from France. ING writes, “The pair likely requires a persistent stream of positive Middle East headlines to stay supported. In the absence of that, we would expect a move back below 1.1600 sooner rather than later.”
  • JPY remains reluctant to deviate from the 159.00 mark despite hawkish remarks from BoJ's Koeda. JPY fundamentals remain bearish amid reporting around the Supplementary Budget and terms of trade. Koeda’s remarks overnight, “BoJ needs to continue to raise the policy interest rate”, mark the second non-dissenting member to indicate willingness to tighten policy (Masu+Koeda). This shows that last meeting’s 6-3 vote split will be vulnerable in June’s meeting, with the aforementioned members’ remarks indicating a possible 5-4 vote split for a hike, where interest rate futures currently imply a 77% probability of such action.

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