Dollar Holds Firm Ahead of Fed Meeting; Sterling Resilient on Strong Wage Growth
The US dollar maintained its strength on Tuesday, hovering near three-week highs as investors awaited the Federal Reserve’s final policy meeting of the year. The Dollar Index, which measures the greenback against a basket of six major currencies, ticked up 0.2% to 106.740, reflecting market anticipation for the Fed’s upcoming decision. While a 25 basis-point rate cut to a target range of 4.25%-4.50% is widely expected, market participants are keen to gauge the Fed’s forward guidance on the pace of future rate reductions. This cautious anticipation stems from recent economic data, including Tuesday’s report showing a surge in services-sector activity to a three-year high. Furthermore, upcoming US retail sales data are expected to show robust growth, potentially bolstering the Fed’s confidence in the economy and reducing the likelihood of aggressive rate cuts in 2025. Analysts suggest that the dollar’s strength could persist unless the Fed signals a more dovish path than anticipated.
Sterling demonstrated resilience against the dominant dollar, holding steady at 1.2680. This firmness came on the heels of encouraging UK wage growth data, which exceeded expectations. Average earnings, excluding bonuses, rose by 5.2% in the three months to October, surpassing forecasts of a 5.0% increase. This positive development for sterling comes ahead of the Bank of England’s policy meeting on Thursday, where the central bank is expected to maintain its current interest rate stance. The robust wage growth figures potentially strengthen the arguments of more hawkish members within the Monetary Policy Committee (MPC) who advocate for a cautious approach to easing monetary policy amidst persistent inflationary concerns.
The euro dipped 0.2% to 1.0486 against the dollar following disappointing German business sentiment data. The Ifo Business Climate Index declined to 84.7 in December, falling short of expectations and highlighting the ongoing challenges facing the German economy. This weaker-than-anticipated reading underscores the persistent weakness in Europe’s largest economy, adding further pressure on the euro. The gloomy sentiment amongst German businesses reflects the continuing economic headwinds facing the Eurozone, including high inflation and the ongoing energy crisis.
In Asian markets, the Chinese yuan weakened slightly against the dollar, trading at 7.2925, remaining near a two-year low. Recent economic data revealed a significant slowdown in Chinese retail sales growth in November, underlining the persistent weakness in consumer spending. This slump in consumer activity reinforces concerns about the health of the Chinese economy, which continues to grapple with the impact of strict Covid-19 restrictions and a struggling property sector. The Japanese yen also depreciated against the dollar, reaching 153.78, as market participants awaited the upcoming Bank of Japan policy meeting. Reports suggest the central bank is likely to hold interest rates steady this week, contrary to earlier speculation of a potential hike.
The ongoing strength of the US dollar reflects the relatively robust performance of the US economy compared to its global counterparts. While the Fed is expected to slow the pace of its aggressive rate hikes, the underlying strength of the US economy and the prospect of continued, albeit slower, rate increases are supporting the dollar. The contrasting economic picture in Europe, with weakening growth and persistent inflationary pressures, is weighing on the euro. Meanwhile, the challenges facing the Chinese economy, including slowing growth and weak consumer spending, continue to exert downward pressure on the yuan. In Japan, the central bank’s expected decision to hold rates steady contributes to the yen’s weakness against the dollar.
Market attention remains firmly fixed on the Federal Reserve’s policy meeting, with investors eagerly awaiting the central bank’s guidance on future rate hikes. The Fed’s assessment of the US economy and its outlook for inflation will be crucial in determining the direction of the dollar in the coming months. The performance of other major currencies will largely depend on their respective central banks’ policy decisions and the evolving economic landscape in each region. The interplay of these factors will continue to shape global currency markets in the near term.
