US dollar update
US dollar summary
Several key factors have influenced this week the dollar movements and market expectations. A notable shift in sentiment has been observed due to a combination of geopolitical tensions, economic data releases, and central bank communications.
Geopolitical Tensions and Market Mood
There are rising geopolitical tensions in the Middle East, specifically involving Iran-backed Houthi forces. Recent events include the launch of anti-ship ballistic missiles at a US-owned, Greek-operated tanker, escalating tensions in the region.
US Economic Data and Federal Reserve Outlook
The US Dollar has seen fluctuations amidst a cautious market mood. Despite a tech rally-led risk-on sentiment failing to extend in Asian markets, the dollar index holds around 103.12, indicating resilience. This stability is partially attributed to strong US economic data, notably the unexpected decline in initial jobless claims to their lowest level in nearly 1.5 years. This data suggests a tightening labor market, reducing the likelihood of an imminent Federal Reserve rate cut. Retail sales data also exceeded expectations, contributing to a tempered outlook for aggressive policy easing.
Global Currency Movements
The euro and the yen have experienced notable movements. The euro dropped against the dollar, while the yen emerged as the biggest loser, weakening significantly due to Japan’s tepid economic data and a lack of confidence in imminent rate hikes by the Bank of Japan.
Interest Rate Expectations
Market expectations for Federal Reserve interest rate cuts have been dialed down. Investors now anticipate 140 basis points of cuts this year, a decrease from the previous week’s expectation of 165 basis points. The likelihood of the first cut occurring in March has also been revised downwards to approximately 53.8%, according to FedWatch tool.
Bond Market Response
In response to these developments, the 10-year Treasury yields, have risen this week and are currently at 4.138%.
Overall, the foreign exchange market is currently navigating a complex landscape shaped by geopolitical risks, robust US economic data, and evolving central bank policies. The US dollar’s resilience amidst these dynamics is a key theme, influenced heavily by labor market conditions and Federal Reserve communication.
Market Views & Opinions
According to Westpac’s head of foreign exchange strategy Richard Franulovich “The thumping message from U.S. activity data and central bankers is that markets are too aggressively priced for rate cuts in 2024, both on timing and in magnitude.”
ING in a recent report says about EUR/USD “EUR/USD can, however, reconnect with its short-term dynamics should a convergence of EUR to dollar rates occur, for example on the back of a large repricing in ECB rate cut expectations. This is currently our baseline scenario for 2024 and the reason why we are bullish on EUR/USD.”
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.
a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.