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By the end of the week, the dollar deflated to a monthly low, but does not lose hope for an unexpected reversal to growth. Today's report of the basic PCE price index in the US can change everything.
On Friday morning, the dollar index is on track for a second consecutive weekly decline. It has already sunk by 1.5% since Monday, while last week it fell by 1.37%, retreating from a 20-year peak above 105.
Yesterday, the US currency exchange rate dropped to 101.43 points for the first time since April 25. Demand for the dollar as a protective asset has plummeted amid a return of risk appetite.
On Thursday, there was increased interest in stocks on the Asian and US stock markets.
Also, traders' sentiments regarding the Federal Reserve's further tactics continue to put pressure on the greenback.
Now that inflation expectations in America have begun to gradually decline, the market is no longer waiting for hawkish surprises from the central bank.
On the contrary, more and more investors are inclined to believe that the US central bank may slow down or even suspend the tightening cycle in the second half of the year.
The risk that America may take a dovish course allowed the EUR/USD pair to take a short-term advantage. At the beginning of Friday, the euro rose against the greenback to the highest level since April 25 – 1.0765.
Growing fears about a slowdown in economic growth in America amid a recent stream of pessimistic data also played in favor of the dollar bears.
As the preliminary report on GDP for the first quarter of 2022 showed, the US economy shrank by 1.5% year on year. This is below the forecast of 1.3%.
Meanwhile, European politicians continue to brush off fears of a looming recession due to the Russian-Ukrainian crisis.
In addition, the ECB is finally ripe to start fighting inflation by raising rates. The hawkish comments of the officials this week also contributed to the growth of the EUR/USD pair.
Despite the euro's confident rise at the beginning of the day, the risk of its fall against the dollar is still high. Today the greenback can change direction and again take a bullish acceleration.
Today investors will be focused on the core PCE price index in the US over the past month.
Core PCE is a measure of price changes for goods and services (excluding food and energy) that are purchased for personal consumption.
Economists now expect the indicator to rise by 0.3% in April, the same as a month earlier.
However, in light of the recent jump in the core consumer price index by as much as 0.6% versus the forecasted 0.3%, there is a high probability of an unexpected increase for a less volatile indicator - the core PCE price index.
If the Fed's preferred inflation indicator rises above forecasts (at least by 0.4%), this could cause a hawkish reaction from the US central bank.
Strengthening expectations of a faster rate hike by the Fed could trigger another rally in the dollar and significantly weaken the euro's position.
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