Our USD Strength Momentum Indicator reveals a notable shift in the greenback’s strength dynamics. In May, the USD’s strength was less broad-based compared to April. Only eight currencies showed exceptional strength of more than 80% in May, a significant decrease from the 16 currencies in April. This shift was further underscored by the fact that May was also the first month since February that the USD’s strength fell below the breakeven 50% level for some currencies, including the INR, MYR, GBP, NZD, AUD, and HKD. While the CHF, JPY, and CNY remained the least favoured currencies, the USD’s momentum against them was no longer a solid 100%. 
The DXY Index started falling from 106.5 after the FOMC meeting on May 1; Fed Chair Jerome Powell said the next policy rate move was unlikely a hike. Until the June dot plot says otherwise, the market has already reduced bets to a single Fed cut in September vs. seven at the end of 2023. More importantly, markets also tempered rate-cut expectations in other central banks. The Bank of England, Swiss National Bank, and Reserve Bank of New Zealand are also expected to lower rates once in 2H24, even the European Central Bank and the Bank of Canada after their expected rate cuts in June. The Washington-Tokyo-Seoul trilateral joint statement on April 17 to “consult closely” on foreign exchange rate markets also opened the door for some central banks in Emerging Asia to intervene and stem excess volatility in their exchange rates. Following alleged interventions in Japan, the markets have priced another 30 bps rise in Japan’s interest rates in 2H24 to stabilize the JPY. 
Additionally, the US economy became less exceptional after GDP growth slowed to an annualized 1.6% QoQ saar in 1Q24, a significant drop from 3.4% in 4Q23 and 4.9% in 3Q23. On Thursday, the US Bureau of Economic Analysis could revise down 1Q24’s growth to 1.3%. US nonfarm payrolls declined to 175k in April from a 14-month high of 315k in March. Meanwhile, the Eurozone and the UK economies expanded in 1Q24 and exited their technical recessions posted in 2H23. Despite scepticism, China’s outlook stopped deteriorating from the government’s stimulus to support the economy and measures to stabilize the property sector, with the central bank anchoring the CNY through steady fixings. Given that the DXY is at the high side of the 100-107 range set in 2023, markets will be wary about Powell being correct about US inflation slowing again on a month-on-month basis; ergo, the critical focus on this Friday’s PCE deflator inflation report.
Quote of the day
“It’s not what you look at that matters, it’s what you see.”
Henry David Thoreau
28 May in history
The first indoor swimming pool opened in London in 1742.
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