On Monday, the U.S. dollar remained relatively unchanged as investors braced for a week filled with crucial inflation data that could significantly impact central bank policies. The Fed uses the PCE price index as a primary tool to assess inflation, and the U.S. will release this critical economic data in the upcoming week.
It is forecasted to rise by 0.4% every month. In addition, significant inflation figures are expected from the eurozone, Japan, and Australia. The U.S. dollar index was marginally lower at 103.82, while the euro gained 0.2% against it to reach €1.0849.
Central Banks Vow Inflation Control
ECB officers persistently underscore their commitment to controlling inflation, specifically in the service industry and salary development. ECB President Christine Lagarde noted the moderated wage growth in her most recent remarks but emphasized that it did not signify the defeat of inflation.
Only two weeks ago, the investor community assumed the Federal Reserve and European Central Bank would each cut interest rates by around 0.8 percentage points for the Fed and one percentage point for the ECB, respectively. By Monday, this gap had almost vanished entirely.
Traders are focusing on Thursday's publication of the U.S. core PCE index, which is expected to be a significant market mover. Market expectations are high that producer and consumer inflation readings may come in hotter than anticipated, which could further delay the Fed's first rate cut.
U.S. Durable Goods Orders Plummet
In the United States, the Census Bureau of the Commerce Department reported a 6.1% decline in orders for durable goods last month. These goods, designed to endure for three years or more, include items from toasters to aircraft. Economists surveyed by Reuters had anticipated a 4.5% drop in durable goods orders.
Market expectations for the timing and magnitude of Federal Reserve rate cuts this year have recently diminished. This shift is attributed to the persistent strength of the U.S. economy and the limited easing of inflation pressures.
CME Group's FedWatch Tool indicates a 54.9% likelihood of the Fed initiating rate cuts in June and a 35.3% probability of no rate cut. This marks a shift from the February 1 predictions, which favored a 62% chance of a cut in March.
"A still softish DXY (dollar index) doesn't quite convey the USD's story right here ... and, if anything, key upcoming event risk can potentially fuel another leg up," Westpac's head of F.X. strategy, Richard Franulovich, stated.
"The bulk of DXY's gains this year have unfolded over just a handful of marquee sessions, and outside that, it has been decidedly consolidative," he added. "The lacklustre DXY in recent days looks mostly like a continuation of that profile."
News that Japan fell into technical recession in H2 2023 will have dampened some of the market's enthusiasm regarding the pace of monetary tightening from the BOJ
Jane Foley, head of FX strategy at Rabobank
Crypto Surge; Dollar Dips Slightly
Within the world of cryptocurrencies, Ether experienced an 8% increase, reaching $3,177, while Bitcoin saw a 6.89% gain, reaching $54,506.
Carol Kong, a currency strategist at the Commonwealth Bank of Australia, noted that the data may surpass current market expectations, potentially providing a modest boost to the dollar. The dollar index shows a 0.2% decrease, settling at 103.74.
On Tuesday, Japan's nationwide consumer prices are anticipated to reveal a slowdown in core inflation to an annual rate of 1.8% in January, marking the lowest since March 2022. This challenges the Bank of Japan's (BOJ) plans to end negative interest rates in the coming months, exerting near-term pressure on the yen.
In contrast, sterling experienced a 0.2% rise against the U.S. dollar, reaching US$1.2696. However, it slightly retreated by 0.1% against the euro, settling at 85.50 pence.