Some good data in the US may cast further doubt on the ability of the Fed to stick to its ultra-dovish stance and give some support to the dollar, especially against the low-yielders. EUR/USD may move below 1.2000, but evidence of vaccination speeding up in the eurozone bodes well for a EUR rally in the longer run. In Brazil, a 75bp rate hike is widely expected
USD: Good data may offer some short-term support
The dollar enjoyed a small corrective rally yesterday, amid a generalised risk-off sentiment in global markets that was exacerbated by Treasury Secretary Janet Yellen suggesting that interest rate increases may have to rise to prevent overheating in the economy. Yellen clarified that she was not endorsing or suggesting monetary tightening, and indeed rate expectations hardly moved – not a surprise considering the Fed reiterated its cautious rhetoric only last week – which is why the dollar’s reaction was relatively contained and almost entirely due to a general flight to safety. A speech by the Fed’s Charles Evans today may see some comments aimed at downplaying any tightening speculation. Data-wise, two releases will be closely monitored in the US today. First, ADP payroll numbers, which are expected to come in strong at 850k (our US economist is in line with consensus) and will have a big role in forming expectations ahead of the jobs report on Friday; second, the ISM services index for April, where we expect a rise to 64.0. Two strong releases may cast further doubt on the ability of the Fed to hang on to its dovishness and could help the dollar stay supported today. Low-yielders may be the main underperformer if the dollar inches higher, while activity currencies may still benefit from the supported reflationary story and some evidence of vaccination rollout gathering more pace in key regions of the world. In the longer run, we remain dovish on the dollar, with another potential negative factor – a record US trade deficit at $74.4 bn – confirmed in yesterday’s data.