The week kicked off with the U.S. dollar holding steady as investors assessed U.S. economic data in anticipation of the upcoming Federal Reserve policy meeting. Concurrently, rising geopolitical tensions in the Middle East curbed risk sentiment.
On Monday, the dollar index, gauging the U.S. currency against six counterparts, showed minimal movement at 103.50, remaining in proximity to the six-week high of 103.82 reached the previous week. With a 2% increase projected for January, the index reflects a recalibration of expectations regarding early and substantial U.S. interest rate cuts.
Following the Fed’s unexpected dovish stance in December, forecasting 75 basis points of rate cuts in 2024, traders initially factored in aggressive easing, anticipating a cut as soon as March. However, resilient economic indicators and resistance from central bankers prompted a reassessment. Presently, the CME FedWatch tool indicates a 48% likelihood of a rate cut in March, contrasting with an 86% probability at the close of December.
Marc Chandler, Chief Market Strategist at Bannockburn Forex, noted that while the markets acknowledge the end of the tightening cycle, there has been an exaggerated swing in expectations toward aggressive easing by many G10 central banks. He anticipates continued correction of these trends in the coming weeks, building on the adjustments initiated last month.
On Friday, data showed a moderate increase in U.S. prices in December, keeping annual inflation below 3% for a third consecutive month and reinforcing expectations for potential rate cuts this year.
Investors are closely watching the Federal Reserve’s two-day policy meeting starting Tuesday, anticipating the central bank to maintain rates. All eyes will be on Fed Chair Jerome Powell’s comments. Economic data, including U.S. jobless figures and a payrolls report, will provide insight into the labor market’s strength.
The euro declined 0.08% to $1.0842, heading for a 2% monthly drop. Despite the European Central Bank keeping rates at 4%, traders expect rate cuts from April, pricing in nearly 140 basis points of easing for the year.
Sterling rose slightly to $1.2704, up 0.01% ahead of the Bank of England’s policy meeting. The Japanese yen strengthened to 148.07 per dollar but is on track for a 5% decline in January, its weakest since June 2022, as expectations for the Bank of Japan’s policy normalization have tempered.
Geopolitical concerns emerged after a drone attack in Jordan killed three U.S. service members, with U.S. President Joe Biden attributing it to Iran-backed groups. The safe-haven yen may experience a temporary boost.
In other currencies, the Australian dollar increased by 0.29% to $0.6591, and the New Zealand dollar gained 0.12% to $0.60975. Bitcoin rose by 0.55% to $42,2016 in the cryptocurrency market.
According to Reuters
By. Pham Thanh Bien
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