U.S. dollar weakens after weak U.S. business data raises recession risks

0

US PMI KEY POINTS:

  • US composite PMI falls to 51.2 in June from 53.6 in May, hitting a five-month low
  • Flash Services Trading activity at 51.6 vs. 53.4 previously, also a five-month low. Meanwhile, the manufacturing PMI fell to 52.4 from 57 a month ago, its worst reading in 23 months.
  • The anemic growth suggests that the US economy failed to rebound significantly in the second quarter and that a recession could be imminent

Most read: EUR/USD Reservoirs as Shocking PMI Signals Rising Recession Risks

WE economic activity continued to decelerate at the end of the second quarter, weighed down by sky high price pressures and weakening request conditions. According to S&P Global, its Flash Composite Purchasing Managers Indexwhich combines manufacturing and services output data, fell to 51.2 in June of 53.6 last month, reaching its lowest level since the beginning of the year when the omicron variant abruptly halted the recovery. Any reading above 50 signals an expansion while readings below this level indicate a contraction.

Turning to internals, the services PMI fell to 51.6 from 53.4 in May, disappointing expectations that had called for a modest increase to 53.5. The manufacturing PMI, for its part, fell to a 23-month low of 52.4 from 57, well below the consensus forecast (see below).

DAILYFX ECONOMIC CALENDAR

Source: DailyFX Calendar

Although the manufacturing and service sectors managed to grow this month, the pace of expansion has slowed considerably, raising serious concerns about the health of the economy and the possibility of a recession medium term.

The U.S. dollar, as measured by the DXY Index, erased its gains and briefly slipped into territory after data from the S&P Global Purchasing Managers’ Index crossed the wires, deepening its decline in recent days. This reversal coincided with a pullback in US Treasury rates, with the 2-year yield and 10-year yield trading at 2.95% and 3.04% respectively, down about 50 basis points from the peak of their cycle last week.

Although expectations may change, yields have been revised lower on fears that the The US economy could be heading for a slowdown tightening of financial conditions.The Fed waited too long to start removing adaptation measures crawling inflation and is now trying to time rate hikes in the most aggressive moves since Paul Volcker ran the bank in the 1980s, breeding the probability of a self-induced crisis.

US DOLLAR REACTION

US dollar index chart

Source: TradingView

Concern grew after Fed Chairman Powell acknowledged that the powerful Shares could trigger a recessionsaying such a scenario is possible and calling a soft landing “very difficult” in the current environment. It is therefore not surprising that the market has started to reduce bets on future monetary tightening. For example, traders are now pricing a terminal rate of 3.41% for next year according to federal funds futures, up from 4.15% a week ago, a reversal of 74 basis points in less than 10 days.

Fed Funds Futures Implied Rate (May 2023)

U.S. dollar weakens after weak U.S. business data raises recession risks

Source: TradingView

Today’s PMI reports confirm that US economic activity is rapidly slowing. This situation could lead investors to bet that the Fed will blink and not deliver on its promise to raise borrowing costs forcefully beyond 2022, paving the way for lower US yields. This scenario could weaken the US dollar in the coming months, provided that panic and extreme risk aversion do not break out in financial markets.

EDUCATION TOOLS FOR MERCHANTS

  • Are you just getting started? download beginners guide for traders
  • Want to know more about your trading personality? Take the DailyFX Quiz and discover
  • IG’s customer positioning data provides valuable insight into market sentiment. Get your free guide on how to use this powerful trading indicator here.

—Written by Diego Colman, Market Strategist for DailyFX

element inside the

element. That’s probably not what you wanted to do! Upload your application’s JavaScript bundle to the item instead.
Share.

About Author

Comments are closed.