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Buoyant risk sentiment fades as US PMIs add to sticky inflation concerns. US yields/dollar firm as PMIs surprise higher; Septmer Fed cut odds below 60%. Eurozone PMIs continue trend of improving survey data; brighter conditions

Currencies / analysis
Buoyant risk sentiment fades as US PMIs add to sticky inflation concerns. US yields/dollar firm as PMIs surprise higher; Septmer Fed cut odds below 60%. Eurozone PMIs continue trend of improving survey data; brighter conditions
USD rising
Source: Copyright: galexs

By Stuart Talman, XE currency strategist

Buoyant risk sentiment earlier in the day has waned following the release of S&P Global's PMIs in the US, reporting a step-up for input prices, fueling concerns that inflation will fail to meaningfully recede in the months ahead. US business activity accelerated through April, growth in the services sector expanding at its quickest pace in a year.

US treasury yields and the dollar, which had been under pressure prior to the PMI data, reversed course as market participants again question whether the Fed will gain the required confidence to commence cutting the target rate before year-end.

The New Zealand dollar and other risk sensitive assets were notably higher  heading into US trade, buoyed by yet another blowout earnings report from AI darling, Nvidia. Opening up over 1% in the New York morning, the Nasdaq has handed back all of its gains whilst the S&P500 and Dow trade deeper into negative territory heading into the second half of US trade.

Marking intraday highs in the 0.6130's, the New Zealand dollar shed circa 30 pips following receipt of the stronger-than-expected manufacturing (50.9 vs 50.0, expected)  and services (54.8 vs 51.3) PMIs. Price action is following a similar path to the day prior - a swift rejection of the day's highs preceding another dip below 61 US cents.

Suitable conditions have failed to emerge to enable Kiwi dollar bulls to drive NZD/USD decisively through an evolving 0.6130/50 resistance zone. 

That being said, NZD downside has been halted in the 0.6080's throughout this week, indicative of indecision given the prevalence of a push-pull dynamic that ultimately has contained the Kiwi within a drearily tight circa 70 pip weekly range.

Choppy, sideways price action may be the state of play over the next couple of weeks given the US economic calendar remains subdued until the release of the BLS jobs report (non-farm payrolls), 07 June.

Core PCE, the Fed's preferred inflation gauge is released next Friday, however, may not induce significant volatility given it can be calculated from the CPI data that was release last week. Core PCE for April should print at 2.7% or 2.8%, matching the prior months to sustain the sticky inflation narrative.

We look for NZD/USD to range between 0.6040 and 0.6140 in the run up to jobs data.

In other news from Thursday, the theme of improving eurozone survey data continued as a stronger-than-expected manufacturing PMI (47.4 vs 46.2) lifted the composite PMI to its highest level in 12 months. Whilst the services PMI did miss the consensus (53.3 vs 53.5), the result consolidates the notably higher trend to start the year, indicative of sustained economic momentum following last year's stagnant period.

Whilst the Kiwi's upside momentum against the euro stalled following the turn in risk sentiment through US trade, NZD/EUR continues to trend higher. Marking highs through 0.5660, Wednesday before slipping back below 0.5640, yesterday, the pair has rebounded close to 3% from the 01 May swing low.

Given the ECB has prepared the market for a June cut and the RBNZ are clearly in no rush to commence their easing cycle, NZD/EUR will likely favour an upside bias whilst respective policies diverge.

The next major topside test for the pair is a critical resistance zone located at 0.5710/40.

Looking to the day ahead it’s a busy Friday morning with the domestic releases of ANZ-Roy Morgan Consumer Confidence and April trade balance in addition to another speech from RBNZ Governor Orr…..although none of these events are likely to influence short term direction.

National level CPI for Japan and UK retail sales are other data points to note.

It's shaping up as an uneventful end to an uneventful week given the absence of event risk through US trade…..the Kiwi likely to log a modest week-on-week decline, closing within proximity to 61 US cents.

Stuart Talman is Director of Sales at XE. You can contact him here

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