Dollar weakens as jobless claims surge, Euro reaches 10-day high

The euro-dollar exchange rate reached a 10-day high as an increase in jobless claims raised concerns among traders ahead of the upcoming Federal Reserve meeting. The dollar and Treasury yields both experienced a decline in response to the surge in initial claims, which marked the highest level since October 2021.

While some policymakers have hinted at a potential pause in the series of 10 consecutive interest rate hikes, the unexpected rate increases by the Reserve Bank of Australia and the Bank of Canada this week have led to speculations that the Federal Reserve may follow suit.

Despite the release of the report, the pricing of Federal Reserve policy remained relatively unchanged. Consequently, it is still widely anticipated that there will be no rate hike in June, followed by a final 25 basis point hike in July, with further rate cuts becoming more probable from December onward.

The significant increase in initial jobless claims, which marked the largest month-on-month rise in nearly two years, raised concerns, especially considering the decline in the May ISM services employment index below the 50 breakeven level, as well as the seventh consecutive month of contraction in the ISM manufacturing index.

Furthermore, this increase in claims follows a remarkable rise in May payrolls, which was overshadowed by a 0.3% surge in the unemployment rate and a 310,000 drop in the household survey’s employment measure.

There is growing concern that the pricing out of approximately 100 basis points of Federal Reserve rate cuts in the second half of the year, due to post-banking crisis and debt ceiling considerations, may have gone too far. Signs of slowing global growth are becoming evident.

Additionally, after almost a year of the Treasury yield curve inversion resulting from a 500 basis point increase in rates, the Federal Reserve is much closer to the end of its tightening cycle, which has boosted the value of the dollar. In contrast, the European Central Bank and the Bank of England still have interest rates well below the local inflation rate.

As a result of these developments, the euro gained 0.75% against the dollar, pausing the downward trend observed in April and May.

The British pound also experienced a 0.9% increase, benefiting from the expectation that the Bank of England will raise rates by approximately one percentage point, bringing them in line with the Federal Reserve. This anticipation is driven by concerns over inflation driven by rising wages.

The dollar-yen exchange rate dropped 0.85% and approached its 21-day moving average, June’s low, and the 23.6% Fibonacci retracement level of the March to May rally, situated at 138.62/44/27. If the Federal Reserve’s rate hikes are peaking, the highs observed in May 2023 may indicate the end of the overbought market conditions and a correction driven by speculation.

The release of the US Consumer Price Index (CPI) on Tuesday next week will be closely watched, as it will set the stage for the upcoming meetings of the Federal Reserve, the European Central Bank, and the Bank of Japan.