US recap: Hawkish Fed, consumer outlook keep EUR/USD below key hurdles
May 10 (Reuters) -The dollar index rose 0.23% on the week, largely due to continued yen weakness, though it got some broader support on Friday following hawkish Fed comments and Michigan sentiment weakness being driven by rising inflation, unemployment and interest rate concerns that the U.S. central bank may have to contend with.
EUR/USD fell 0.07% on Friday after retreating from its high of 1.0791 at the confluence of the 200-day moving average, downtrend line across March, April and May highs and the 50% Fibo of the March-April slide.
The rebound in Treasury yields following Dallas Federal Reserve President Lorie Logan's observation that policy may not be restrictive enough to tackle inflation melded hawkishly with the May Michigan 1-year consumer inflation outlook rising sharply to 3.5% from 3.2% in April, its highest since November 2023.
Overall consumer sentiment's retreat from 77.2 to 67.4 left it at its lowest since November, with inflation concerns the proximate cause of that slide.
USD/JPY rose 0.2% on Friday and 1.7% for the week, having nearly halved last week's 160.245-151.86 collapse that had come on suspected intervention and softer U.S. labor data. That mid-point at 156.05 remains close by, with prices supported by a rebound in Treasury-JGB yields spreads that fell sharply over the preceding six sessions.
Japan's MoF and BoJ have continued talking about action they might take to keep the yen from melting down like it did in late April to its weakest since 1990, but swaps are only pricing in 22bp of Japanese rate hikes by year-end, and 2-year JGB yields at 0.31% don't suggest much more next year. And the intervention threat is perceived highest if USD/JPY again threatens 1990's 160.35 high.
Key for USD/JPY and demand from carry traders is U.S. data and Fed expectations, with the May 15 CPI and retail sales the top upcoming event risks.
Futures currently price in just 41bp of Fed rate cuts by year-end, down from 45bp before today's hawkish events, but within the context of repeated data indications the hot U.S. labor market is cooling off and perhaps eventually testing the Fed's dual policy mandate.
Sterling rose 0.05%, getting some support from unexpectedly positive UK GDP data. Friday's 1.2541 high is by the tenkan line that crossed bullishly above the kijun on Monday. Its gains Friday owed more to risk-on flows, as Gilt-Treasury yield spreads were slightly more negative, with the BoE priced to cut in August and by 55bp by year-end.
USD/CAD fell 0.04%, maintaining a portion of its earlier slide on much stronger than forecast Canadian jobs data, while aussie fell 0.2% in response to the rise in Treasury yields and drop in key commodities.
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Editing by Burton Frierson
Randolph Donney is a Reuters market analyst. The views expressed are his own.
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