US recap: EUR/USD drops amid broader dollar rise as risks weighed
USD/JPY-Makes a risk-off play for May 1 plunge peak by 158 pre-US data deluge
AUD/USD-US yields, soured risk gives bears traction
USD/CAD regains 1.37 as Canada bond yields lag UST rise
May 29 (Reuters) -The dollar index rose 0.4% on Wednesday, gaining ground broadly on doubts about scope for Fed easing, upward pressure on U.S. and other governments' borrowing costs, while geopolitical unease favored the safe-haven U.S. currency.
The Fed's beige book report affirmed the recent mix of survey results, save for Tuesday's better consumer confidence report, of lingering inflation and disparate reports of economic expansion and somewhat more pessimistic overall outlooks. The somewhat drab report took Treasury yields and the dollar off its highs.
EUR/USD fell 0.40%, retreating further from Tuesday's failed attempt to clear May's 1.0895 highs that were capped near April's peak.
German inflation was above forecast while core held at 3.0%, though the ECB is still priced to cut rates at next week's meeting. There is, however, some risk the ECB may be jumping the easing gun as German real wages had a record 3.8% rise in Q1 and consumer sentiment rose for a fourth straight month, suggesting the currency region's largest economy may not need monetary stimulus.
Bund 2- and 10-year yields rose 4.3bp and 10bp, while Treasury 2- and 10-year yields rose 3.8bp and 9bp. Germany's debt-to-GDP being about half that of the U.S. suggests less upward supply-demand pressure on bund yields versus Treasurys, but Wednesday's EUR/USD fall was tied to risk-aversion, not yield spreads.
Treasury yields and Fed pricing will get major data updates with Friday's core and overall PCE and next week's ISMs, JOLTS and May employment reports. Total Fed rate cuts discounted by the market in 2024 have tumbled to 31bp currently from 160bp early this year.
USD/JPY rose 0.3% and is closer to 157.99, the May 1 high that preceded that day's plunge to 153 on suspected Japanese intervention. Prices got fresh buy signals on Tuesday and today, with the 76.4% Fibo of the April-May 160.245-151.86 slide likely in play at 158.26.
Dwindling 2024 Fed rate cut pricing and the very modest 27bp of BoJ hikes from its current near-zero rate keep carry trade demand in place, regardless of intervention risk.
Sterling fell 0.36%, also weighed down by risk-off flows and long profit-taking from Tuesday's overbought high at 1.2801, as the whopping 12bp surge in 10-year gilts yields helped lop 0.86% off the FTSE. Though less than the 1.08% drop in the STXE 600 that helped send EUR/GBP to its lowest since August 2022, as the BoE only has one 2024 rate cut fully priced in versus two from the ECB.
Aussie fell 0.53%, gaining no traction from Australian CPI unexpectedly rising to a 5-month high of 3.6%, up from 3.5% in March and the 3.4% forecast. Here again, Aussie's role as a risk proxy weighed, as did a setback in commodity prices.
Also hanging over risk acceptance are concerns that the war in Gaza will continue all year, that as tensions rise between Russia and NATO regarding the war in Ukraine.
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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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