US dollar update
US dollar summary
The foreign exchange market has observed a nuanced blend of political events and economic indicators influencing the US dollar’s (USD) trajectory in recent days. On the political front, former US President Donald Trump’s landslide victory in the Nevada and Virgin Islands primaries has captivated market attention, alongside an interview with Russian President Vladimir Putin by former Fox News reporter Tucker Carlson, revealing Putin’s focus on Ukraine over broader Western engagement. These developments, while significant, have not directly impacted market data, which remains sparse with anticipation building for a speech by Lorie Logan of the Dallas Fed post-European market close on February 9th, 2024.
Economic indicators have shown resilience, particularly in the US labor market. The release of stronger-than-expected job data has pushed the 10-year Treasury yield to 4.17%, indicating robust workforce retention with initial unemployment insurance claims dropping to 218,000, below the forecasted 220,000. This robust employment data supports the dollar’s strength.
Federal Reserve officials have provided insights into the monetary policy outlook, suggesting a more conservative approach to rate cuts in 2024 than previously anticipated. With fewer rate cuts expected—two or three as per Minneapolis Fed President Neel Kashkari—and the need for more data to confirm a sustained inflation decline as highlighted by Fed Governor Adriana Kugler, the sentiment has shifted toward a reduced probability of rate cuts in March, significantly lower than the earlier projections at the start of the year.
Consequently, the dollar index has maintained its level around 104.07, encapsulating the market’s adjustment to the strong job data and the Federal Reserve’s cautious stance on policy easing. The market anticipates a less than 20% chance of a Fed rate cut in March, marking a stark contrast from the higher expectations earlier in the year. This confluence of factors has contributed to the dollar index’s expected gain of about 0.25% for the week, marking its sixth consecutive weekly advance. All investors’ eyes are on the U.S. inflation announcement next Tuesday.
Market Views & Opinions
ING in a recent report, highlights that, given the prevailing market sentiment favoring lower rates this year, the Dollar faces a higher risk of depreciation. This outlook could gain further traction with the upcoming January CPI readings, which ING forecasts to be modest, with headline inflation at 0.2% month-over-month and core inflation at 0.3%.
Scotiabank in today’s market commentary, says that “The USD is trading firm on the day and week and underlying momentum signals are leaning bullish but beyond that, there are some softer technical signals creeping into longer term price action in the DXY, suggesting markets may be turning a bit less constructive on the USD overall after its early year rally. At the very least, the USD needs more support from higher yields and/or stronger data to advance from here I think—and solid US Treasury auctions this week suggest investors are happy to participate with the 10Y yield nearing recent highs around 4.20%”
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