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Flash: USD rally hits brick wall following inflation and jobs data miss - DBS Group

FXstreet.com (Barcelona) - DBS Group analysts note that yesterday’s strong rally in the US dollar hit a brick wall after US inflationand jobs data came in well below expectations.

They note that CPI inflation retreated to 1.1% YoY in April from 1.5% in the previous month, further away from the Fed’s 2% inflation target. Elsewhere, Initial jobless claims bounced above 350K to 360K for the latest week ending May 11, and they ask, “How does this change the outlook for QE3?”

According to San Francisco Fed President John Williams,the US economy has held up better-than-expected despite the fiscal consolidation. They write, “While there is more confidence in the jobs market, its present recovery is only sufficient to consider tapering asset purchases, but not strong enough to end QE3.” Based on his assumption for growth to accelerate to 3.25% in 2014 from 2.5% this year, they note that Williams reckoned that the recent decline in inflation is temporary.

Further, while open to reducing asset purchases as early as summer, Williams was careful to add that this depended on his assumptions for recovery. In the end, they feel that the tone on asset purchases will probably be set by Fed Chairman Ben Bernanke next week, when he testifies before the Joint Economic Committee on May 22. They write, “Expect many questions from US lawmakers on the Fed’s intentions on asset purchases. Until then, exchange rates are likely to consolidate after a week of strong USD gains.”

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