US data hurt the dollar, ECB to cut rates again

ADP and ISM non-mfg. PMI disappoint ahead of NFP

The dollar slipped against all its major peers on Wednesday, reversing a large portion of the recovery it made on Tuesday. Today, it is trading mixed, losing ground against the risk-linked aussie and kiwi, and gaining versus the yen.

What prompted traders to abandon their dollars again was the weaker-than-expected US data. The ADP report on private employment showed that private payrolls rose only 37k in May, far less than the expected 111k, with April’s print being revised down to 60k. What’s more, the ISM non-manufacturing PMI dropped into contractionary territory, mainly driven by a tumble in new orders, which adds to the notion that Trump’s tariff strategy is negatively impacting the US economy.

Just after the ADP numbers, US President Trump reiterated his calls for the Fed to lower interest rates, but investors have not moved the needle much in terms of their monetary policy expectations. They remain convinced that the Fed will deliver only two more 25bps rate cuts by the end of the year.

This may be attributed either to the prices subindex of the ISM PMI rising to a three-year high, corroborating Fed officials’ concerns about upside risks to the inflation outlook, or to investor caution ahead of Friday’s official jobs report.

Weak jobs data and more trade uncertainty to weigh on dollar

If the NFP report confirms that the labor market continues to soften, the dollar is likely to extend its decline and perhaps signal the continuation of its prevailing downtrend. However, for market participants to significantly increase their rate-cut bets, wage growth may also need to slow down. Initial jobless claims for the last week of May, due out today, may also help investors get a better picture of labor-market conditions in the US.

That said, besides paying attention to the US data, investors are likely to remain worried about news and headlines surrounding trade negotiations. Following the White House announcement that US president Trump will have a call with his Chinese counterpart Xi Jinping, Trump called Xi tough and “extremely hard to make a deal with,” adding to the uncertainty over how these uncharted waters will be navigated, especially by the world’s two largest economies.

BoC says a further rate cut is possible, ECB set to cut today

Apart from the US data, yesterday’s agenda included a Bank of Canada decision as well. As was widely anticipated, policymakers kept interest rates unchanged at 2.75%, but noted that another rate reduction may be necessary if tariffs weaken the economy.

Yet, the Canadian dollar strengthened after the decision, perhaps because signalling one more quarter-point cut is still a more hawkish view than the market's pricing of around 35bps worth of reductions by the end of the year.

Today, the central bank torch will be passed to the European Central Bank. Contrary to the BoC, this Bank is expected to lower interest rates by 25bps, and thus, the attention is likely to fall on the statement, President Lagarde’s press conference and the updated macroeconomic projections.

Recent remarks by Lagarde suggest that she may continue sounding worried about the economic outlook, which combined with the slowdown in inflation for May, could increase the likelihood for today’s 25bps reduction to be accompanied by a dovish message. If so, the euro is likely to pull back, but it may be too early to argue about a trend reversal, as another round of ‘Sell America’ on renewed tariff threats by US President Trump could add fresh fuel to the euro’s engines.