Dollar Edges Higher But Set for Weekly Loss as Core Inflation Eases; Sterling Retreats on Weak Retail Sales
The US dollar saw a modest uptick on Friday but remained poised for a weekly decline following the release of cooler-than-anticipated core inflation data, suggesting a potential easing of monetary policy later this year. Meanwhile, the British pound weakened against the dollar after disappointing retail sales figures raised concerns about the UK’s economic outlook.
As of Friday morning, the Dollar Index, which measures the greenback against a basket of six major currencies, had inched up by 0.1% to 108.930. However, the index was still on track for a weekly drop of approximately 0.5%, marking a break in its six-week winning streak. This retreat followed the release of softer inflation data, which fueled speculation that the Federal Reserve might adopt a less aggressive stance on interest rate hikes in the coming months. Although Fed officials have signaled caution regarding rate cuts, some, like Fed Governor Christopher Waller, have acknowledged the possibility of three or four rate cuts if economic indicators continue to weaken.
Market analysts at ING noted a cautious optimism surrounding the month-on-month slowdown in core inflation. They pointed out that market participants are already factoring in potential inflationary pressures from government policies, which are currently significantly above the target level. Consequently, despite stretched positioning and short-term overvaluation, the dollar remains resilient against catalysts for a substantial correction.
Across the Atlantic, the British pound fell 0.4% against the dollar to 1.2197 after December retail sales data unexpectedly contracted by 0.3% month-on-month, following a downwardly revised 0.1% expansion in November. This disappointing performance raises concerns about the possibility of an economic contraction in the fourth quarter, following data earlier in the week showing minimal growth in November. Market expectations suggest the Bank of England will cut interest rates in February, with two rate cuts already priced in for 2025.
The euro also experienced a slight dip against the dollar, trading at 1.0300 ahead of the release of final eurozone inflation data for December. ING analysts observed that the EUR/USD exchange rate appears to have stabilized around the 1.0300 mark, reflecting a 2.5-3% risk premium, or undervaluation. They anticipate this undervaluation will persist until greater clarity emerges regarding potential protectionist trade policies.
In Asian markets, the Japanese yen strengthened by 0.3% against the dollar, reaching 155.79, nearing its highest level in a month. This surge followed comments from several Bank of Japan officials hinting at a potential interest rate hike at their upcoming meeting. The Chinese yuan traded 0.1% lower at 7.3289 against the dollar, after reaching a one-year high earlier in the week. China’s economy grew by 5.4% in the fourth quarter, exceeding expectations of 5%, driven by a series of recent stimulus measures.
This week’s currency movements underscore the ongoing sensitivity of markets to economic data and policy pronouncements. The dollar’s retreat, despite its recent strength, highlights the impact of easing inflation concerns on expectations for future monetary policy. Meanwhile, the weakness in the British pound reflects growing anxiety about the UK’s economic prospects, while the yen’s gains point to potential shifts in Japanese monetary policy. As the global economic landscape continues to evolve, currency markets are likely to remain volatile, responding to emerging data and policy developments.
