The US dollar asserts its dominance over major currencies as markets price in policy divergence:
The dollar index fell to around 104.6 on Thursday
after investors’ expectations of a nearly 44% rate cut by the Federal Reserve Bank in May diminished,
according to market pricing.
Topics
Inflation Data
This decline marks a sharp decrease since the beginning of February
when a rate cut by that time was seen as certain,
influenced by strong inflation data and recent comments from central bank officials.
Data on Tuesday showed that the core inflation rate fell to 3.1% in January from 3.4% in December,
but it came in higher than expectations of 2.9%.
The core inflation rate remained unchanged at 3.9%, defying expectations of a slowdown to 3.7%.
Markets are not currently anticipating a rate cut by the Federal Reserve
in March and the likelihood of action in May has been reduced.
Meanwhile, Chicago Federal Reserve President Austan Goolsbee said on Wednesday
that the central bank should be cautious about waiting too long before lowering interest rates.
Federal Reserve Vice Chairman for Supervision Michael Barr also said
that the latest inflation data suggests a clear path toward the 2% inflation target.
Investors are now looking to January retail sales and weekly jobless claims figures on Thursday.
European Union
On the other hand, the European Commission stated that the European Union’s
economy entered 2024 weaker than expected and lowered
its growth forecast for this year by 0.4 percentage points to 0.8% in the euro area.
After narrowly avoiding a technical recession in the second half of last year,
the prospects for the first quarter of this year remain weak, according to economic forecasts for winter 2024.
Forecasts suggest that the European Central Bank, like other major central banks,
will be more stimulative than the US Federal Reserve.
According to Ippek Ozkardeskaya,
senior analyst at Swissquote Bank, markets are currently expecting
more interest rate cuts by the European Central Bank than those made
by the Federal Reserve this year, supporting the strength of the dollar against the euro.
She states, “In this way, the decline in the value of the euro against
the US dollar remains well-supported by fundamentals.”
However, the hawkish shift from the Federal Reserve and the strength
of the US dollar could alleviate the European Central Bank’s dovish
stance and put a brake on euro-selling operations against the US dollar