The US dollar stumbles despite a risk-off environment

Here is what you need to know for Friday, July 1:

Risk-off was the theme on Thursday across most markets. Being the final day of the month, quarter, and half-year, there were some important developments which keep the outlook for the new quarter concerning for global growth.

Weak inflation-adjusted consumer spending in the US only adds to these worries and in turn, equities and rates are being pushed lower. US yields fell, with the 10-year down to a low of 2.97%, below the 3.00% psychological level, around 50bp below the peaks hit earlier in June. Equities were also weaker, with the S&P 500 down 1%. 

In FX, DXY extended above 105.000 but fell sharply with the Yen regrouping as yields drop. The dollar rally remains largely intact, given rising worries about a global recession, although data on Thursday was far from impressive and did nothing to allay concerns about the US economy sinking towards a recession.

The highlights of Thursday’s data schedule were a faster monthly pace of growth in the PCE price index, steady personal income expansion, and slower spending growth. Personal income was up 0.5% in May, right on expectations after a 0.5% gain in the previous month. 

In other data, the Chicago PMI fell to 56.4 in June from 60.3 in May. Other manufacturing data already released have suggested slower growth or outright contraction. The ISM’s national index will be released on Friday. Initial jobless claims decreased by 2,000 to 231,000 in the week ended June 25, but the four-week moving average rose by 7,250 to 231,750, continuing the string of gains.

The euro recovered on Thursday from a two-week low against the dollar, which sputtered after fresh inflation data showed US consumer spending rose less than expected in May. EUR/USD hit a high of 1.0488 and closed the North American session within that vicinity after reversing a decline sparked by increasing recession jitters in the eurozone and the energy crisis stoked by the war in Ukraine. For the start of the quarter, traders are going to be looking at eurozone inflation figures due on Friday which could give some insight as to how aggressive the ECB might be in hiking rates.

The yen regathered below the 24-year peak of 137 vs. the dollar although the gap between a hawkish Federal Reserve and a dovish Bank of Japan continues to weigh heavily on the Japanese currency. USD/JPY fell to 135.55. The yen was down 15% against the US dollar for the first six months of 2022, which makes for the worst first-half of year performance for the currency since 2013.

Gold declined in its worst quarter since early 2021 and is back to test $1,800. In cryptocurrencies, bitcoin fell below the $20,000 milestone level and the US Securities and Exchange Commission rejected a proposal to list a spot bitcoin exchange-traded fund by digital asset manager Grayscale. Bitcoin last fell to $18,595 and is down some 58% in the first six months of 2022, its worst first-half of year showing ever. West Texas Intermediate (WTI) crude oil also dropped sharply as concerns of a recession.