Dollar's Strength Falters Ahead Of Central Bank Decisions
The momentum of the US dollar has encountered challenges as it takes a pause from the recent data-driven rally observed at the end of the previous week. The focus is now on upcoming central bank decisions in Japan and Europe, contributing to a temporary halt in the dollar's upward trajectory.
Although trading remains relatively subdued, the Japanese yen notably rebounded from its one-month low of 148.80 on Friday. This year, the yen has depreciated significantly against the dollar, retracting about 5 per cent after swiftly reversing from its December peak at five-month highs around 140.
The Bank of Japan's two-day meeting, starting on Monday, has garnered attention. However, expectations for an exit from negative interest rates at this meeting have diminished, influenced by the recent earthquake on Japan's west coast and dovish commentary from the Bank of Japan.
In early trading, the dollar's trade-weighted index showed a slight 0.07 per cent decline, resting at 103.19, and remained stable against the euro at USD 1.0898.
The dollar's performance in the new year has been cautious and unpredictable, with investors struggling to gauge when the Federal Reserve might initiate rate cuts. Despite resilient US economic data reducing expectations of an imminent rate cut, San Francisco Federal Reserve Bank President Mary Daly emphasized that the economy and monetary policy are in a "good place," dispelling notions of immediate rate cuts.
Market sentiment, reflected in short-term interest rate futures, indicates a shift in expectations, with the probability of a March rate cut dropping below 50 per cent, down from nearly 80 per cent in early January, according to CME Group data.
Chris Weston, Head of Research at online broker Pepperstone, highlighted the correlation between the evolving implied pricing for a March Fed cut and the fluctuation of the USD. He suggested that significant changes in these odds might not occur until later in the week when the Fed's core inflation indicator, the core personal consumption expenditures (PCE) price index, is released.
While there is potential for further correction in the US dollar, analysts at NatWest Markets noted a more balanced outlook for near-term Fed pricing. Treasury yields, which move inversely to prices, have risen in recent days as central bank officials pushed back against expectations of a swift move to lower rates.
The upcoming week holds key events for markets, including the European Central Bank and Turkey's policy meetings on Thursday, a busy earnings season, and geopolitical tensions affecting global trade and supply chains in the Red Sea.
Before the ECB policy meeting, the debate among policymakers has shifted, acknowledging a potential reduction in borrowing costs, but likely later and milder than market expectations. Market analysts are skeptical of the ECB's inflation outlook and anticipate multiple cuts throughout the year.
Despite these factors, US stocks have experienced significant gains, with the S&P 500 confirming its bull market status and reaching a record high close for the first time in two years on Friday. Much of these gains are attributed to investor optimism regarding potential Fed rate cuts.
