FX Analysis – USD looking vulnerable after soft data

The negative dollar reaction to a modest tick-up in US jobless claims yesterday (231k versus consensus 212k) where the US Dollar Index (DXY) dropped from session highs at 105.74 to close at session lows of 105.20 seems to be telling FX traders that tells us that:

1. a) markets are probably lacking some sense of direction in the period between payrolls and US CPI.
2. b) the generally overbought dollar remains quite vulnerable to even slightly softer US data releases.
3. c) markets may be buying in more convincingly on the softening US jobs market narrative.

Beyond very short-term price movements, it’s looking like the key for the USD to trend 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.

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. From the Fed the most interesting speaker will be Neel Kashkari, who recently argued for a higher neutral rate, which would suggest current monetary policy is not as restrictive as perceived.