The Euro to Dollar (EUR/USD) exchange rate fell back from weekly highs on Friday to trade around $1.0708.
USD rates were bolstered by strong US NFP data that showed the US economy added339K jobs, above market expectations of 190K.
Overall, US data releases have remained mixed with evidence of increasing divergence.
The manufacturing sector has remained clearly in recession with the ISM manufacturing index in contraction territory below the 50.0 level for the seventh successive month.
The services-sector data, however, has been stronger with solid expansion.
The potential confusion was illustrated by the latest US employment report.
Non-farm payrolls increased 339,000 for may compared with expectations of 200,000 after a revised 294,000 increase the previous month, but the unemployment rate increased to 3.7% from 3.4%.
The dollar index hit a 9-week high in late May before a limited correction with the Euro to Dollar (EUR/USD) recovering from 9-week lows at 1.0635 to trade around 1.0730.
Fed Looking to Skip June Rate Hike
The recent comments from Fed speakers appear to have nudged the debate towards holding rates steady in June, but Fed members have continued to fight back against any talk that rates have peaked.
Futures markets indicate just under a 30% chance of a June rate hike.
MUFG commented; Overall, the comments will help to put a dampener on the US dollar’s recent upward momentum but are unlikely to trigger a deeper reversal lower while incoming US economic data is keeping alive expectations for another hike in July.
US Debt Default Averted
Last week, the US Administration and House Speaker McCarthy announced that they had reached a deal to raise the debt ceiling with the Administration agreeing to curb spending growth.
Although there was opposition to the deal from the left and right, the deal has won approval in Congress and will be signed into law by Biden.
Although markets assumed that a deal would be reached, there were some nerves and an element of relief that any possibility of default has been removed.
The deal will tighten fiscal policy slightly.
TD Securities notes; “The debt ceiling bill should have a modest negative impact on the economy via the fiscal impulse.”
With the debt ceiling raised, BNPP Paribas notes that the US Treasury could be selling $880bn of bonds over the next 3-4 months.
With central banks also now selling bonds it adds; “this suggests more than $1trn of excess liquidity potentially drained from the market in the next 3-4 months.”
According to BNPP; “This is especially concerning as one of the most rapid liquidity drains in history would be occurring at a point when valuations across US risk assets are rich, risk premium is low and the market is heavily positioned short USD, especially against high-yielders.”
Overall risk conditions will be important with markets monitoring equity markets closely.
On seasonal grounds, equities tend to lose ground in June with the month the second-worst performer on the calendar.
Weaker risk conditions would tend to underpin the dollar.
Euro-Zone Data Disappoints
The Euro-Zone data releases have been generally weaker than expected with notable reservations over the German developments amid a fresh retreat in business confidence.
According to HSBC; “Our Eurozone Activity Surprise Index plunged following a raft of worse than expected soft data releases. In particular, German IFO Expectations dropped to 88.6 vs 91.6 consensus.”
According to Lloyds Bank; The ECB seems set to raise rates again in June but what happens after is less clear. Markets are giving a high probability to the chances of another hike in July, however, comments from ECB policymakers suggest that they are divided on how far rates need to rise.”
Chinese Reservations Increase
The Chinese data has been generally disappointing with concerns that the post-covid recovery is stalling.
According to Nomura; “the 31 May release of the May Chinese manufacturing PMI showing declines for a third straight month for both the headline figure and the new orders index.”
It also noted that steel prices have declined to the lowest level since September 2022, illustrating industrial concerns.
The Euro tends to lose out when confidence in the Chinese outlook deteriorates.
MUFG added; “at the same time the softening outlook for growth outside of the US is providing more support for the US dollar.”
According to Credit Suisse; “The House View is neutral on EURUSD on a 3-6 month horizon. We stay bearish for a cluster of key supports, starting at 1.0554 and stretching down to the 200-day average, now at 1.0494.”
On seasonal grounds the Euro tends to strengthen in June with gains in 8 out of the last 12 Junes.
According to ING; “we reiterate that this 1.05/1.07 area should prove a base for EUR/USD this summer - given that conditions are nowhere near as severe as those that drove EUR/USD so much lower this time last year.”
Danske Bank still expects EUR/USD will retreat to 1.03.