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Dollar Expected to Steady Amid Economic Uncertainty

The U.S. dollar is poised to stabilize in the upcoming weeks as recent economic indicators present a mixed picture of the American economy. Following a period of turbulence, analysts at ING anticipate a subdued trading environment with reduced volatility until more definitive data emerges.

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Recent inflation metrics have revealed a modest deceleration, with core Consumer Price Index (CPI) registering a 0.3% month-on-month increase, marking the first slowdown in six months. Conversely, April’s retail sales figures displayed stagnation, igniting speculation regarding a potential slowdown in U.S. economic momentum. Despite these divergent signals, the Federal Reserve’s persistent apprehension regarding inflation suggests that interest rates are likely to remain elevated for an extended duration.

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Comments from members of the Federal Open Market Committee (FOMC) subsequent to the CPI release underscore a cautious approach towards monetary policy. While hawkish FOMC member Neel Kashkari emphasized the prospect that current policy might lack sufficient tightening, Austan Goolsbee, known for a dovish stance, conceded that further measures may be necessary to achieve disinflation.

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Market sentiment has shifted, with forecasts now leaning towards two rate cuts within the year, a sentiment not prevalent in recent months. This outlook contrasts with the views of some analysts, who envision a more dovish trajectory, with three rate cuts commencing in September 2024. However, these projections are contingent upon forthcoming economic data, such as core Personal Consumption Expenditures (PCE) figures scheduled for release on May 31 and early June’s employment data, which could reinforce a dovish narrative if they align with prevailing trends.

The recent surge in the yen may be short-lived, as disappointing growth figures from Japan have dampened the currency’s momentum. In an environment characterized by subdued volatility, carry trades are anticipated to emerge as a preferred strategy among investors. The dollar, particularly against low-yielding currencies like the yen, is expected to stabilize within the 104/105 range.

Today’s U.S. economic calendar includes jobless claims, April housing starts, and the Philadelphia Fed Business Outlook index. These releases, along with speeches from Fed officials including Raphael Bostic, Loretta Mester, and Thomas Barkin, could influence market sentiment. Additionally, retail sales and industrial production data from China will be closely scrutinized as they may set the tone for market sentiment heading into the weekend.

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