On Friday, the dollar fell versus the euro and pound as the market rebalanced ahead of the long weekend and awaited signals on how the Federal Reserve intends to continue combating still-high inflation.
Many Federal Reserve members said this week that the US central bank will most likely need to boost interest rates further to restore inflation to target levels. This hawkish rhetoric, along with stronger-than-expected economic statistics, has prompted some institutions to project three more rate rises this year.
As data this week showed continued inflation and labour market resiliency, Goldman Sachs expects the Fed to raise rates three more times by a quarter-point each time.
“The market is kind of recalibrating itself for the coming months. “The most realistic one, I think, is going to be the 25 basis points in March and then another 25 basis points in May,” said Amo Sahota, director at Klarity FX in San Francisco.
The cost of energy goods drove up monthly producer prices in January, according to statistics released by the United States on Thursday, but the number of Americans submitting new claims for jobless benefits surprisingly declined last week.
This occurred as statistics released on Wednesday revealed that retail sales in the United States grew by the most in almost two years in January, following two consecutive monthly drops.
“I think retail sales was a big one, and then the Fed speakers just helped kind of cement the idea from there,” Sahota said. “Nobody really wanted to let go of the idea that Goldilocks would return, and now it appears that someone ate all the porridge.”
Fed funds futures traders now expect the fed funds rate to hit 5.29% in July and continue over 5% for the rest of the year. The Fed’s goal range now stands at 4.5% to 4.75%, up from 0% to 0.25% in March 2022.
The dollar index was up 0.03% at 103.88, having previously reached 104.67, its highest level since January 6.
“While the dollar is giving up some of its recent gains against the euro and sterling today, the movements are relatively minor going into the holiday weekend.” “The market has already reacted to recent strong data prints in anticipating the Fed’s playbook to keep the dollar at its current level, but what happens next is still a question,” said Uto Shinohara, managing director and senior investment strategist at Mesirow.
“Investors are waiting for more information to act as a catalyst. … In the meantime, the trimming of long dollar positions and covering of Euro and Sterling shorts following the dollar’s recent pop can be expected as the market awaits the release of FOMC meeting notes on Wednesday, hoping for clues revealing the pulse of the Fed.
The pound was up 0.35% at $1.2035, while the euro was up 0.24% at $1.0694 after sliding to $1.06125 earlier in the day, the lowest since January 6. European Central Bank (ECB) policymakers have also made plain that they anticipate euro zone rates to keep climbing.