The negative dollar reaction to a modest tick-up in US jobless claims yesterday (231k versus consensus 212k) tells us that: a) markets are probably lacking some sense of direction in the period between payrolls and US CPI; b) the generally overbought dollar remains quite vulnerable to even slightly softer US data releases; c) markets may be buying in more convincingly on the softening US jobs market narrative.
Beyond very short-term adjustments, the key to taking the dollar materially lower remains inflation. Consensus is looking at 0.3% month-on-month core CPI print on Wednesday, which is still too high for the Fed to start cutting rates this summer. Any substantial – and sustainable – downward trend in the dollar may not be a story for May.
Today’s US calendar includes only the University of Michigan surveys. Markets will be watching closely whether the medium and long-term inflation expectations have moved at all from April’s 3.0/3.2% levels. On the Fed’s side, there are plenty of speakers to keep an eye on. Among those is Neel Kashkari, who recently argued for a higher neutral rate, which would suggest current monetary policy is not as restrictive as perceived.
In other markets, Canada will release its jobs report for April today. Expectations are for a decent 20k print and modest uptick in unemployment from 6.1% to 6.2%. There are, however, downside risks as the Canadian labor market has shown some signs of weakening in recent months. A soft print would endorse a June rate cut by the Bank of Canada, which is currently our base case scenario.
Francesco Pesole
