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The S&P Global US PMI survey data outperformed expectations, giving the US dollar a notable boost overnight and reversing most losses incurred after the recent coolish US CPI data release. Getting anxious over minor rate-cut pricing is usually unwarranted, especially early in the year. However, the positive PMI results and the most significant two-week drop in initial jobless claims since September dominated the narrative during an otherwise quiet news period.

While many seasoned FX traders were somewhat surprised by the reaction to the US PMI data, the FOMC minutes have heightened the FX market's sensitivity to even tier 2 economic indicators. This increased attentiveness underscores the market's current propensity to consume and react to even minor fractions of delta on US economic data. 

Indeed, the hawkish tone of the Federal Reserve minutes, coupled with a fall in global risk sentiment, has led to a moderate strengthening of the dollar across the board, a sentiment that is still fresh in traders' minds.

This week, Eurozone data has primarily supported a less dovish stance of the European Central Bank (ECB). Strong PMI results indicated ongoing growth momentum, while negotiated wages unexpectedly rose from 4.5% to 4.7% year-on-year in the first quarter. This wage growth was critical for a potential rate cut in June. However, recent ECB communications have made a June rate hike almost certain. However, a hawkish cut could be on the cards, limiting the Euro's fall.

Japan's headline inflation has held up better than expected, but picking tops in USD/JPY remains tricky. Forex traders anticipate a resurgence in consumer inflation for May, primarily driven by elevated utility prices. This expectation will likely be confirmed by Tokyo's upcoming inflation data, which is scheduled for release next Friday. Despite the anticipated fluctuations in inflation due to various government initiatives, this temporary deceleration isn't expected to alter the Bank of Japan's stance on policy normalization.

Despite this, FX traders continue exhibiting a bullish bias on USD/JPY, driven by a carry-oriented propensity. With only a 25 basis point increase anticipated by year-end and US rate cuts getting pared, traders will likely continue probing the limits of Japan’s FX intervention tolerance. A move towards 158.0 seems increasingly plausible in the coming days. The combination of Japan's modest rate hike expectations and a firming US dollar sets the stage for another test of the Bank of Japan's intervention resolve.

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