Standout PMI data from the Chicago region and an upward revision to the latest consumer confidence figures have sent the dollar higher and will keep the Fed on track to cut asset purchases later this year.
The US dollar (USD) is trading higher against all major currencies this morning. Although USDJPY dropped to a three-week low intraday, the momentum of the selloff was slow, and bids came in above 100. The recovery in the pair accelerated on the back of stronger Chicago PMI numbers.
Today's economic reports were mixed overall, and this means for the time being, the Fed remains on track to taper asset purchases later this year. The bias will only change in the event that US data disappointments start to rack up.
The first set of US data today was disappointing, as personal incomes failed to grow in the month of April, while personal spending dropped 0.2%, marking the first decline since May 2012. It may be good behavior for consumers to cut spending when incomes are flat-lining, but lower consumption is not conducive to higher growth.
The PCE deflator also declined for the second month in a row, which comes as a sign that inflationary pressures remain low.
The dollar recovered its earlier losses when the Chicago PMI index surged to its highest level since March 2012. With manufacturing activity slowing in the New York and Philadelphia regions, investors were bracing for the worst this morning, and when the data surprised to the upside, they rallied the dollar in relief.
The recovery in the greenback was further support by the upward revision in the University of Michigan's consumer confidence index. The preliminary numbers showed that consumer sentiment improved significantly in May, but the revision took the index to its highest level in more than five years (since July 2007).
Once again, this data keeps the Fed on track to cut asset purchases, and outspoken doves Eric Rosengren (Boston), William Dudley (New York), and Fed Chairman Ben Bernanke have all made it clear that they feel changes can be made in the next few months.
Surprise Comments Hit Euro Hard
Meanwhile, the big story affecting the euro (EUR) today surrounds Bank of Italy Governor Ignazio Visco, whose surprise comments about the potential for another rate cut from the European Central Bank (ECB) caused a sharp EURUSD decline. Since Visco is also a member of the ECB Governing Council, his views are particularly important.
However, such comments are not new, which is part of the reason why EURUSD bounced off its lows after the harsh initial reaction.
See also: The EUR/USD’s “Turbulent Tumble”
Earlier this month, Visco said the central bank was "technically prepared" to introduce negative deposit rates. The real question is how many other policymakers feel the same way, and based upon recent comments from the central bank, there is a growing consensus favoring additional stimulus, especially after the recent larger-than-anticipated decline in German retail sales.
We feel that the ECB is far more willing to signal its intention to lower rates than actually follow through with it, however. The bar is high for negative deposit rates, and the Bank would want to see the PMIs decline again before pulling the trigger.
By Kathy Lien of BK Asset Management