DXY likely to remain supported given surprise fall in Eurozone inflation, moderation in the bloc’s economic growth: Scotiabank

The United States’ dollar index is expected to remain supported given a surprise fall in the Eurozone inflation and a moderation in the bloc’s economic growth. In the near term, stabilizing 10-year U.S. Treasury yield post a retracement from 3 percent could see foreign investor resuming their interest in EM Asian assets, but temporarily only, according to the latest research report from Scotiabank.

The US economy added 164,000 jobs in April with the unemployment rate falling to 3.9 percent after holding at 4.1 percent for six consecutive months. The labor force participation rate slid to 62.8 percent in April from 62.9 percent the month before, while the employment-to-population ratio dipped to 60.3 percent from 60.4 in March.

Further, the average hourly pay of private sector workers increased 2.6 percent y/y to USD 26.84 in April, the same as a revised gain in March. It will keep the Fed on track for a gradual path of monetary policy tightening, easing some concern over a faster US inflation.

Ongoing US-China trade tensions could cast a shadow on global external demand, which have led to a pullback in the 10-year UST yield together with the less hawkish May FOMC meeting statement. The US trade delegation ended a round of talks in Beijing on Friday, without any big breakthroughs. Both sides have committed to continue the talks with quarterly meetings.

"Meanwhile, we fasten our seatbelts as it would spark risk aversion and boost demand for safe-haven assets should US President Donald Trump pull out the nation of the Iran nuclear deal on May 12. Oil prices are expected to remain elevated and to advance further down the road, imposing upward pressure on the US inflation," the report added.

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