COMMENT-US recap: EUR/USD up as dollar fails to capitalize on hawkish US data

The dollar index fell 0.28% after wild swings due to below forecast U.S. GDP accompanied by Q1 inflation gauges well above forecast and an unexpected drop in jobless claims that sent Treasury yields to their highest since November and left only one Fed rate cut this year fully priced in.

The euro and most other currencies initially rose in response to the GDP miss, then fell on the core PCE rise to 3.7% and frothy 5.1% services prices ex energy and housing, a metric Chair Jerome Powell has mentioned as a gauge of embedded inflationary pressures.

But EUR/USD rose 0.3% after rebounding from its lows that held Wednesday's 1.0678 low, as the U.S. soft landing and dollar exceptionalism narrative came under review. Keep in mind the Q1 GDP drag from inventories and below trend government spending may set the stage for rebounds in Q2. And growth in personal income increased more than in Q4.

EUR/USD's 1.0741 high on EBS Thursday retraced half of April's 1.0885-601 slide. A further recovery might need Friday's March U.S. core PCE, income and spending data to be softer than forecast.

USD/JPY rose 0.13% in the face of rising Treasury-JGB yields spreads, but with gains moderated ahead of Friday's BoJ meeting where what, if anything, might be done to stem the yen's slide and risk of imported inflation will be the focus.

The MoF has yet to make good on repeated threats to support the yen, which markets had thought might happen in defense of the 155 level that prices now trade above. Those threats were further weakened by comments Wednesday from an LDP official that the party is not yet actively discussing what yen levels would be deemed worth intervention, though 160 or 170 might be eyed.

Adding to uncertainty about intervention was U.S. Treasury Secretary Janet Yellen on Thursday noting that dollar strength is due to economic divergence, and that interventions by other governments in currency markets is acceptable only in rare and extraordinary circumstances. Hardly a green light for the MoF to step in soon.

Sterling rose 0.4%, with the FTSE 100 hitting a record high and being the only major European equity index not in the red. That despite British retailers suffering their worst April for sales since 2020, although the timing of the Easter holidays could be to blame, a CBI survey showed on Thursday.

The market is pricing in 42bp of BoE rate cuts by year-end versus 35bp by the Fed, 61bp by the ECB and 22bp of hikes from the BoJ.

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