Why The Dollar Shrugs Off Dismal Economic Data

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The dollar came off intraday lows to settle back around the 102.00 figure ahead of the opening bell on Wall Street. In the process, the buck almost regained intraday losses, with investor sentiment staying unstable both in the currency and stock markets on Thursday.

On the data front, the second estimate showed that the US economy contracted by 1.5% year-over-year in the first quarter, below the first estimate of -1.4% and the expectation for a growth rate of -1.3%. However, the dollar shrugged off the dismal headline figure, in part due to the fact that consumer spending came in at 3.1% during the quarter, exceeding the prior estimate of 2.7%. Also, the markets have fully priced in a 50 bps at the next two Fed meetings, so the backward-looking data failed to attract market attention. 

As the greenback bounced, EURUSD slipped back to the 1.0700 figure, struggling to retest this week’s highs seen around 1.0750, which implies that the common currency may need a catalyst to stage a more robust and sustained recovery in the near term. The pair is likely to continue to fluctuate within a limited trading range at this stage, refraining from any major breakouts at least as long as the USD index stays above the 100.00 psychological level. 

On Wall Street, the upbeat tone from Wednesday continues today as futures point to higher open, but the upside potential seems limited as investors stay cautious across the globe. Volatility could pick up ahead of the weekend as Friday will bring a look at the core personal consumption expenditures inflation reading, the Fed’s preferred inflation indicator. Should the data come in higher than expected, stocks will turn negative while the dollar may receive a boost.