Dollar Rally Wanes Amid Rate Cut Odds, China Recovery

Key Takeaway

• Dollar's rally may stall due to cooling US inflation and China's recovery, with Bloomberg gauge hitting a one-month low.
• Swaps indicate over 90% odds of a US rate cut by September, up from 80% last week, after recent inflation data.
• Fed officials call for more evidence of disinflation before considering rate cuts, despite welcoming April's slowdown.

Dollar Vulnerability Intensifies

The U.S. dollar is facing increased pressure, potentially halting its rally as signs of cooling U.S. inflation and China's economic recovery emerge. A Bloomberg gauge of the greenback reached a one-month low, influenced by a report showing a slowdown in underlying U.S. inflation for the first time in six months. This trend, coupled with improved risk sentiment and expectations of policy support in China, has led to a bearish outlook for the dollar. Mingze Wu from StoneX Group highlighted the multifaceted challenges facing the dollar, including the lingering effects of U.S. CPI data and potential gains in the yuan.

Rate Cut Expectations Grow

Market expectations for a Federal Reserve rate cut by September have surged, with swaps pricing in over 90% odds following the latest inflation report. This marks a significant increase from the 80% chance factored in at the end of the previous week. However, Fed officials, including Federal Reserve Bank of Chicago President Austan Goolsbee, have called for more concrete signs of disinflation before considering rate cuts. Upcoming U.S. jobless claims figures and speeches from Fed officials will be closely watched for further insights into the U.S. rate trajectory.

Traders Anticipate Dollar Decline

Ahead of the U.S. inflation report, currency traders have been accumulating bearish bets against the dollar, expecting a drop in its value. The anticipation of softer inflation in April has led to speculation about the Federal Reserve's next moves, with Jerome Powell indicating that an interest rate hike is unlikely to be imminent. Kyle Chapman from Ballinger & Co. suggests that a cooler inflation report could fuel hopes for a Fed rate cut this summer, potentially diminishing the dollar's yield advantage. This sentiment is reflected in the Bloomberg Dollar Spot Index's recent slip and adjustments in traders' positions.

Wall Street's CPI Watch

Wall Street is bracing for the impact of the upcoming Consumer Price Index (CPI) report, with significant market movements anticipated in response to the inflation data. Trading desks at major institutions like JPMorgan Chase & Co. and Citigroup Inc. are preparing for a potential 1% swing in the S&P 500 Index following the CPI release. The options market is particularly focused on the core CPI figures, mapping out scenarios based on various outcomes. A higher-than-expected core CPI could lead to a broad selloff in risk assets, while a figure in line with or below expectations could support the market and revive bets for a June rate cut.

Street Views

• Mingze Wu, StoneX Group (Neutral on the dollar):

  "The dollar could slide in the near term, not from a single factor but potentially from death by a thousand cuts... US CPI effect is still being felt."

Management Quotes

• Austan Goolsbee, Federal Reserve Bank of Chicago President:

  "Welcomed the slowdown in price growth in April, but noted that there’s still room for improvement."