01/03/2024
US dollar update
US dollar summary
In recent developments in the foreign exchange market, the US Dollar Index showed volatility with a notable recovery above the 104.00 level, influenced by varying investor expectations and economic indicators. January’s Personal Consumption Expenditure (PCE) Price Index indicated a slight easing in inflation, with a decrease to 2.4% year-over-year from December’s 2.6%, and the core PCE, excluding food and energy, recorded a minor uptick to 2.8% from 2.9%. These figures met market expectations and suggest a nuanced inflation landscape.
The Federal Reserve’s stance on interest rate cuts has been a critical factor, with speculation that rate reductions could be delayed due to persistent inflationary pressures. Market anticipation has shifted, expecting the Federal Reserve to commence interest rate cuts by mid-year, contingent on further inflation data. Comments from Federal Reserve officials, including Atlanta Fed President Raphael Bostic and Chicago Fed President Austan Goolsbee, underscore a cautious approach to adjusting rates, highlighting the unpredictability of inflation’s trajectory. Moreover, New York Fed President John Williams projected interest rate cuts later in the year, contingent on continued economic health and easing inflation, signaling a potential shift in monetary policy.
The interplay between inflation data, Federal Reserve officials’ comments, and market expectations has led to fluctuations in the US dollar’s value. With the market pricing in a significant chance of a rate cut in June, the Federal Reserve’s upcoming decisions will be closely watched for their impact on the foreign exchange market. The evolving economic indicators, including the PCE index and core PCE figures, alongside official remarks and market sentiment, underscore the dynamic and interconnected nature of monetary policy, inflation, and currency valuations.
During today’s trading session, attention will center on the release of the US ISM Manufacturing PMI for February. Markets are expecting the manufacturing data to show a slight increase to 49.5, up from January’s figure of 49.1, yet still under the benchmark level of 50.0 which distinguishes between expansion and contraction in the sector.
Market Views & Opinions
Scotiabank in a yesterday post regarding the U.S. labor market concludes: “As a bottom line, labour markets remain surprisingly resilient, but leading data remains consistent with some further cooling ahead. We now believe the Fed will embark on its rate cutting cycle in May (instead of March) amid the recent upside surprises on hard data, but we still think cuts are only delayed, rather than cancelled. Finally, we flag that January data is prone to distortions from the heavy seasonal adjustments. The NFP adjustment factor was not unusually small/large this year, but we still believe employment growth is set to slow down back below 200k in February/March.”
UOB in today’s post provides a compact outlook of the major markets’ performance in the previous month:
“Wall Street ended another positive month. The Nasdaq was the best performer in Feb with a 6.1% gain. The S&P 500 climbed 5.2%, while the Dow added 2.2% for its first four-month winning streak since May 2021. Yields on US Treasuries inched lower following the latest inflation data. The 10-year Treasury yield fell 3 bps to 4.244%. The yield on the 2-year Treasury declined almost 2 bps to 4.629%. As a result, the 2-year and 10-year yield spread inversion narrowed slightly (by +0.5 bps) to -36.7 bps. The US dollar advanced against most of the major currencies on Thu. The US Dollar index (DXY) rose by 0.17% to 104.156. EUR/USD traded to an intraday low of 1.0796 before closing the NY session at 1.0805. GBP/USD settled at 1.2625. USD/JPY ended the day lower at 149.98. NZD/USD closed at 0.6087 (from 0.6098) but the AUD/USD closed a tad higher at 0.6497 (from 0.6496).”
IMPORTANT DISCLAIMER
The information in this report is of a general nature only. It is not a piece of personal financial advice. It does not take into account your objectives, financial situation, and personal needs.
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