USD Bounces Back as Equity Markets Tumble

Tuesday saw the US Dollar claw its way back from Monday's losses, with the Greenback gaining traction thanks to hefty safe-haven inflows amid widespread declines in major equity markets. This resurgence is underpinned by growing anticipation that the Federal Reserve might steer towards policy normalization come September. This sentiment was bolstered by a lackluster US ISM Manufacturing PMI report for May, which painted a picture of a decelerating growth trajectory for the world's largest economy.
The ISM Manufacturing PMI, a key indicator of factory sector health, dropped to 48.7, missing the consensus estimate of 49.6 and down from April's 49.2. This marks the second consecutive month of contraction, with businesses showing hesitance to invest due to ongoing monetary policy challenges and broader economic conditions. The report highlighted a sluggish demand environment and diminishing inflation pressures. The Prices Paid Index, which reflects input cost trends, decreased to 57.0 from a forecasted 60.0 and April’s 60.9. This slowdown in input costs suggests a tempering of inflation fears, as slower cost growth typically leads to reduced pressure on selling prices.
The EUR/USD pair recently attempted a breakout above the key 1.09 level but failed to gain significant traction as buyers encountered strong resistance. Despite this setback, the price has managed to hold above the previously breached resistance line, suggesting that the uptrend might still be intact. The overall structure shows a bullish formation, indicating potential for further gains if the pair can gather enough momentum to clear the 1.09 hurdle convincingly. Traders should watch for sustained movement above this level as an indication that the bullish trend is likely to continue:

In the economic arena, investors are keenly awaiting several key indicators that could further validate the current cautious outlook for the US economy. Among these, the US JOLTS Job Openings report for April stands out. Despite being a lagging indicator, a continued decline in job openings could signal a waning of the previously strong US labor market, further denting the narrative of American economic exceptionalism.
In currency markets, safe havens like the Japanese Yen and Swiss Franc have outperformed the Greenback amid the broad risk-off sentiment preceding the upcoming US labor market data release. According to interest rate futures, there’s a 38.4% probability that the Federal Reserve will maintain current interest rates in September, with a 52.6% chance of a 25 basis point cut and an 8.9% likelihood of a 50 basis point reduction. For the upcoming June 12 meeting, markets are fully anticipating that rates will remain unchanged.
Meanwhile, the Pound Sterling has pulled back from the 1.2800 resistance level against the USD during Tuesday’s New York session. The GBP/USD pair's retreat comes after hitting a fresh two-month high, as the USD bounces back in anticipation of the May Nonfarm Payrolls data release on Friday. This key labor market report will offer new insights into the Fed’s timeline for potential rate cuts.
Speculation around the Bank of England (BoE) and its rate cut trajectory remains relatively subdued, partly due to a lack of significant economic data releases and the silence from BoE officials until after the upcoming elections. Markets are betting on a BoE rate reduction in August. Despite the UK’s annual headline Consumer Price Index dropping very close to the target level of 2% (the latest reading is 2.3%), persistent service sector inflation remains a concern for BoE policymakers.
The sudden shift towards risk aversion also impacted the Pound, causing GBPUSD to rebound from a crucial resistance level after its second test on Monday. Nevertheless, the current price movement, characterized by consolidation near this resistance, indicates that buyers are hesitant to alleviate pressure without significant fundamental data, such as Non-Farm Payroll figures, which could alter the USD outlook. It's conceivable that any decline will be brief, with buyers likely to reengage once the dust settles following today's risk-off sentiment:

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