US and Eurozone inflation data in focus

The US dollar pulled back across the board yesterday as the second estimate of US GDP revealed that the world’s largest economy grew at a slower pace than previously estimated in Q1.

Treasury yields slid as well, but market expectations with regards to the Fed’s future course of action were not altered much. Investors continue to anticipate around 35bps worth of rate reductions by December, with the probability of a first quarter-point cut in September resting at around 55%.

Today, dollar traders will lock their gaze on the core PCE index, the Fed’s favorite inflation metric. Expectations are for the index to have held steady at 2.8% y/y for the third consecutive month in April but bearing in mind that the core CPI rate slid somewhat, there may be some downside risks.

A slowdown in PCE inflation may encourage some participants to add to their September rate cut bets and thereby push the US dollar a bit lower. However, considering that the preliminary S&P Global PMIs revealed that both input and output prices accelerated in May, a major repricing may be unlikely.

After all, Fed officials continued expressing concerns about the risks to inflation, with Dallas Fed President Lorie Logan saying overnight that it is too soon to really be thinking about rate cuts. Earlier in the day, New York President Williams delivered similar remarks.

The euro may also be a protagonist today as the preliminary Eurozone CPI data are on the agenda. German inflation rose slightly more than projected yesterday, with the core rate holding steady at 3.0% y/y, decently above the ECB’s 2% target.

Numbers pointing to some stickiness in the Eurozone as well are unlikely to affect expectations about a 25bps rate cut by the ECB next week, but they could prompt traders to scale back their bets with regards to further reductions.

Combined with a softer core PCE price index in the US, this could help euro/dollar climb higher and perhaps aim for the key zone of 1.0890, which has been stopping the bulls from marching further north since May 15.

All three of Wall Street’s main indices closed in the red yesterday, with the Nasdaq losing the most as Salesforce shares tumbled nearly 20% after the firm reported profit and revenue forecasts below analysts' estimates. The downward revision of US GDP as well as the increase in jobless claims for last week may have also weighed.

The futures market seems calmer today even as former President Donald Trump was found guilty on all 34 charges he faced concerning a hush-money payment before the 2016 elections. Perhaps, the lack of market reaction is because Trump can still run for president after his conviction. However, any changes to the political scene due to the verdict or the sentencing, which is set for July 11, could increase market volatility.

Oil prices extended their tumble as US gasoline inventories rose, confounding expectations of increasing demand ahead of the Memorial Day weekend that signals the start of the summer driving season. Focus now turns to Sunday’s OPEC+ meeting, with sources saying that members are working on a deal that would allow an extension of some of their production cuts into 2025.