USD: The US dollar has recently come under some pressure as Treasury yields dropped significantly following the higher than expected US inflation data last week.
The reaction might seem illogical as higher inflation should lead to higher interest rates, but the market might be starting to worry about growth
If economic activity deteriorates, the Fed might be forced to keep a hawkish bias due to persistent inflationary pressures. This could put further pressure on economic growth and eventually require rate cuts. In fact, further out the curve, we saw a slightly dovish repricing in interest rates expectations despite hot inflation and no changes on the geopolitical side.
If the market’s focus shifted to growth concerns, then the US Flash PMIs on Friday will be a key test. Strong data could quell those fears and give the US dollar a boost. A soft report, on the other hand, will likely increase growth concerns and put further pressure on long-term Treasury yields and the greenback.