USD: End-of-week rally looks overdone

The dollar has found good support since yesterday afternoon when some US data prompted a USD/risk-off rally. The Leading Index printed a positive month-on-month number for the first time in two years, likely thanks to the strong equity performance and a weather-related rebound in the average work week. Existing home sales also surprised on the upside, rising from 4m to 4.4m. Consensus was understandably for a decline given mortgage applications have been falling. S&P PMIs were also published yesterday and showed good resilience in manufacturing, but slightly softer services.

The jump in the dollar appears overdone. The Federal Reserve sent a rather clear message earlier this week: some resilience in activity data won’t be a barrier to cutting as long as inflation shows downward momentum. The USD two-year swap rate climbed by some 5bp after yesterday's data, but remains 5bp below the pre-FOMC levels. The dollar rebound appears to have exceeded the rebound in rates. We suspect the central bank’s dovish surprises in Switzerland (rate cut) and the UK (less hawkish narrative) have contributed to the strong dollar momentum.