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Revised US growth data weakens dollar; EUR/USD volatility low

eurusd analysis

The dollar weakened on Thursday following the release of revised data indicating that the US economy grew more slowly in the first quarter than previously estimated. Initially, the index tracking the US dollar against major currencies reached 105.18, the highest level since May 14. However, after the data release, the index dropped by 0.4%, settling at 104.62. This decline reflects market reactions to the economic data, which suggested that the US economy is not as robust as earlier believed. The slower growth prompted investors to adjust their expectations for future economic performance and monetary policy, impacting the dollar’s value against other major currencies.

The EUR/USD exchange rate faced significant downward pressure due to rising US yields. On Wednesday, the euro fell by 0.5% against the dollar, hitting a two-week low of 1.0789 USD. This drop was influenced by the stronger performance of US Treasury yields, which made the dollar more attractive to investors. However, the euro managed to rebound on Thursday, gaining 0.32% to reach 1.0838. This recovery was driven by a combination of market corrections and perhaps some positive news or data from the Eurozone that temporarily bolstered the euro. Despite this rebound, the overall pressure on the EUR/USD pair highlights the volatility and sensitivity of the exchange rate to changes in economic indicators and market sentiment.

Volatility in the euro-dollar exchange rate remains exceptionally low, indicating a period of relative stability in this currency pair. However, this stability is seen within a narrow trading range, suggesting that significant new information will be required to break out of these recent ranges. The recent 0.5% movement in the exchange rate was notable, as it represented a substantial shift compared to recent standards of low volatility. Market participants are closely watching for economic data releases and other news that could provide the impetus for more significant movements in the EUR/USD exchange rate.

The US Commerce Department reported that the economy grew at an annualized rate of 1.3% from January to March, compared to a previous estimate of 1.6%. This downward revision was primarily due to a reduction in consumer spending, which is a key driver of economic growth. The revision suggests that consumers were more cautious with their expenditures than initially thought, reflecting potential concerns about economic conditions or personal financial stability. This adjustment in the growth rate has implications for overall economic outlook and policy decisions, as consumer spending is a crucial component of economic activity.

The lower-than-expected growth rate aligns with recent data showing weakening retail sales and equipment spending. These indicators suggest that both consumers and businesses are becoming more conservative in their spending habits. The slowdown in retail sales points to reduced consumer confidence or disposable income, while lower equipment spending indicates businesses are hesitant to invest in new assets. These factors collectively contribute to a more subdued economic environment, which in turn has led to reduced market expectations for interest rate cuts by the Federal Reserve. Investors and analysts are adjusting their forecasts for monetary policy in light of this weaker economic data.

This weaker economic data is something the Federal Reserve had anticipated. The below-expectation performance in various economic indicators helps ease some pressure off the Fed to act aggressively in tightening monetary policy. By recognizing and responding to these signs of economic slowdown, the Fed can adopt a more measured approach to interest rate changes. The recent data provides the Fed with the rationale to potentially delay or moderate any planned rate increases, as the economy is not demonstrating the strength that would necessitate more stringent monetary measures.

Expectations for Federal Reserve interest rate cuts this year have been reduced due to signs of persistent inflation. Inflation remains a significant concern, and despite weaker growth data, the Fed must balance this against the need to control rising prices. The sentiment that the Fed might not cut rates as aggressively as previously thought was reinforced by an unexpected rise in consumer sentiment in Tuesday’s data. This increase in consumer confidence suggests that, despite some economic weaknesses, consumers remain relatively optimistic about their financial situations and the broader economy.

According to CME Group’s FedWatch tool, investors now see a 56.6% chance of a quarter-point rate cut by the September meeting, compared to 57.5% a week ago. This slight reduction in expectations reflects the complex interplay of economic data influencing market sentiment. Investors are closely monitoring the Fed’s statements and economic indicators to gauge the likelihood of future rate cuts. The FedWatch tool aggregates these expectations, providing a snapshot of market consensus on the Fed’s potential actions.

Market participants are now eagerly awaiting the release of the Personal Consumption Expenditures (PCE) price index on Friday, which is the Fed’s preferred measure of inflation. This index provides critical insights into inflation trends and consumer spending behavior. The PCE price index data will be scrutinized for any signs of rising prices that could influence the Fed’s decisions on monetary policy. Understanding inflation dynamics is crucial for the Fed as it balances the dual mandate of promoting maximum employment and maintaining stable prices.

In addition to US data, Friday’s inflation data from the eurozone will also be important. The recent stronger-than-expected inflation reading in Germany for April has already influenced market expectations. This data suggests that inflationary pressures are not confined to the US but are also present in the eurozone, which will be crucial for shaping expectations regarding central bank actions on both sides of the Atlantic. The European Central Bank and the Federal Reserve may need to coordinate their responses to these inflationary trends to manage their respective economies effectively.

eurusd analysis
EUR/USD daily chart, MetaTrader, 31.05.2024



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