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Dollar defensive as investors remain cautious ahead of inflation data

The dollar was on the back foot on Friday after an overnight slide as investors tread with caution ahead of U.S. inflation data next week, with worries over an economic slowdown and the pace of the Federal Reserve’s rate hikes hitting sentiment.The dollar index, which measures the U.S. currency against six major peers, was at 103.21, having dropped to as low as 102.63 in the previous session. The index is set to end the week with a small gain, its second straight positive week and a run it has not had since October. Data on Thursday showed the number of Americans filing new claims for unemployment benefits increased more than expected last week, but remained at levels consistent with a tight labour market.

The euro was down 0.07% to $1.0729., while the sterling was last trading at $1.2114, off 0.07% on the day. The Japanese yen weakened 0.12% to 131.74 per dollar. Japan’s government is planning to present the new Bank of Japan governor nominee and two deputy governor nominees to parliament on Feb. 14, Reuters reported on Thursday.

OCBC’s currency strategist Christopher Wong said the foreign exchange market is likely to trade sideways on Friday in the absence of key data and Federal Reserve speakers, putting the focus on the inflation data due next week. “The broad picture is the Fed doing policy calibration… but for the near term there is caution given recent Fed speakers and how disinflation trend may be bumpy.” Last week, the Fed raised interest rates by 25 basis points and said it was seeing signs of disinflation but a blockbuster jobs report rattled investors as they feared policymakers may remain hawkish for longer.

Fed Chair Powell in his speech this week reiterated his belief that disinflation was underway. With inflation data due next week, focus has been on the litany of other Fed speakers, with Richmond Fed President Thomas Barkin adding to the policy rhetoric.


The pound eased on Friday after data showed the UK economy ground to a halt in the final three months of 2022, avoiding a technical recession, but logging zero growth. Monthly British gross domestic product data for December – a month marked by widespread rail strikes and bad weather – showed a 0.5% contraction, the Office for National Statistics said, larger than the 0.3% forecast.

The Bank of England forecast last week that Britain would enter a shallow but lengthy recession, starting in the first quarter of this year and lasting five quarters. “Ultimately, this isn’t a story of whether the UK is in recession or not as that’s just a simple technical definition,” OANDA strategist Craig Erlam said. “It’s a story of zero growth – quite literally in the case of the fourth quarter – and the fact that this likely represents the recent past, present, and near-term future prospects for the UK economy.

High but falling inflation and basically no growth for some time. It’s all a bit bleak really,” he said. “The negative impact on the pound was brief though as the data doesn’t tell us anything we didn’t already know, nor does it alter the outlook on inflation or interest rates,” he added. Money markets show traders believe UK interest rates will peak below 4.40% by late summer, from 4% right now.

UK consumer inflation data is due next week and may have more impact on those expectations. Sterling was last down 0.3% against the dollar at $1.2089, but was still heading for its strongest weekly gain in three weeks, thanks in part to a rebound in investor confidence that has lifted non-dollar currencies and other risk assets. The pound posted its weakest daily performance against the yen, which got a surprise boost from the likely appointment of academic Kazuo Ueda as the Bank of Japan’s next governor, according to two government officials. Ueda, 71, a former member of the BOJ’s policy board and an academic at Kyoritsu Women’s University, is seen as an expert on monetary policy and played a key role in battling the initial phase of Japan’s deflation with the introduction of huge amounts of asset purchases and forward guidance for financial markets.

But most analysts said his appointment was totally unexpected – he was not even considered a dark horse candidate – and it was hard to tell immediately what that meant for any changes in the bank’s near-term monetary policy.


The dollar was little changed to marginally higher on Wednesday as investors paused selling the greenback a day after Federal Reserve Chair Jerome Powell did not significantly change his interest rate outlook despite a strong U.S. jobs report last week. The greenback’s outlook, however, remained tilted to the downside as the Fed nears the end of its tightening cycle and the markets price in rate cuts by the end of the year, analysts said.

In a question-and-answer session before the Economic Club of Washington on Tuesday, Powell said interest rates might need to move higher than expected if the U.S. economy remains strong, but reiterated he felt a process of “disinflation” is underway. The greenback slipped as Powell spoke. “The dollar weakened because Powell was not hawkish. There were a few nuggets in his speech that suggested that the jobs report has not materially shifted the Fed’s outlook,” said Thierry Wizman, global FX and rates strategist at Macquarie in New York. “Despite the data dependency of the outlook since last week, Powell did not even answer questions on whether or not he would have raised rates by more had he seen (the jobs report).

Based on that demeanor, he would have not raised more and the outlook itself has not changed on one data point.” New York Fed President John Williams on Monday added to Fed rhetoric of further pushing U.S. rates higher. He told a Wall Street Journal event that moving to a federal funds rate of between 5.00% and 5.25% “seems a very reasonable view of what we’ll need to do this year in order to get the supply and demand imbalances down.” In afternoon trading, the euro was modestly lower at $1.0724 after falling to $1.067 the previous session, its lowest since Jan. 9. It remained far above September’s 20-year low of $0.953.

Investors also digested hawkish comments from two German officials at the European Central Bank (ECB). “From where I stand today we need further, significant rate hikes,” German central bank chief Joachim Nagel told the newspaper Boersen-Zeitung on Tuesday.


Sterling rose on Monday from a one-month low against the dollar after Federal Reserve Chair Jerome Powell declined to meaningfully harden his tone on inflation, renewing bets of less-aggressive U.S. monetary tightening. Despite last week’s very strong U.S. employment numbers, in a question-and-answer session before the Economic Club of Washington on Tuesday, Powell reiterated he felt a process of “disinflation” was underway. “The stronger pound this morning is largely a spillover from the improved risk environment overnight, which was driven by Chair Powell’s more conservative stance on rates in light of Friday’s payrolls report,” said Simon Harvey, head of FX Analysis at Monex Europe.

Harvey added that the magnitude of the pound’s rally was largely due to its underperformance on Tuesday, “so there is a bit of a catch up effect taking place”. Sterling GBP=D3 was up 0.34% to $1.2091 against the dollar after hitting its lowest level since Jan. 6 on Tuesday of $1.1961. It rose to a six-day high against the euro EURGBP=D3, up 0.16% to 88.89 pence, after falling last week to a four-month low versus the single currency. BOE, GDP IN FOCUS Traders will be waiting for economic growth numbers due on Friday for clues on what the Bank of England’s (BoE) next move will be.

The central bank last week raised borrowing costs for the 10th time to 4%, but hinted it was close to ending its run of rate hikes. Money markets are currently pricing in a peak in BoE interest rates of 4.25% by the summer amid signs inflation is easing. IRPR Britain’s labour market showed some signs of cooling in January with starting pay for people hired for permanent roles growing at its slowest pace in almost two years, according to a survey of recruitment firms published on Wednesday.

BoE Governor Andrew Bailey, who will speak on Thursday to lawmakers about the central bank’s decision to raise rates to a 14-year high, said last week that labour market data would be key for understanding how quickly inflation falls.


The dollar jumped to a four-week high against the euro on Monday, as last week’s blockbuster U.S. jobs report raised the likelihood of the U.S. Federal Reserve keeping on with its inflation-fighting interest rate hikes for longer.The euro slipped 0.6% against the dollar to $1.0724, its lowest since Jan. 9, following a 1% drop on Friday.

The euro remains not far from the 10-month high of $1.1034 hit last week. “Friday’s NFP (nonfarm payroll) number solidified the likelihood of another 25 basis points hike and reduced the chances of an eventual rate cut at the end of the year, sending equities lower and the greenback soaring,” said John Doyle, vice president of operations and trading at Monex USA. “Overall, the dollar’s decline since late November has been impressive.

However, it now looks like it was a bit overdone,” Doyle said On Friday, data showed U.S. job growth accelerated sharply inin January while the unemployment rate hit more than a 53-1/2-year low of 3.4%, pointing to a stubbornly tight labor market, and a potential headache for Federal Reserve officials as they fight inflation. The data came after the Fed on Wednesday raised rates by 25 basis points and said it had turned a corner in the fight against inflation, leading investors to price in a slowdown in the pace of rate hikes going forward.

On Monday, U.S. Treasury Secretary Janet Yellen said she saw a path for avoiding a U.S. recession, with inflation coming down significantly and the economy remaining strong, given the strength of the U.S. labor market.The Turkish lira, under pressure from geopolitical risks and surprise inflation readings out of the country, briefly slipped to a record low of 18.85, in early trade, as a major earthquake hit the region. Sterling slipped 0.2% on the day at $1.20245, a fresh one-month low, as traders look to British growth data and remarks from Bank of England policymakers about the pace of interest rate hikes for clues to the outlook for the British currency.

The yen fell more than 1% against the U.S. dollar after the Nikkei newspaper reported, citing anonymous government and ruling party sources, that Bank of Japan Deputy Governor Masayoshi Amamiya was being sounded out to be the next governor.


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