Dec 15, 2023: The U.S. dollar showed a slight uptick in early European trading on Friday, yet it’s heading for its most significant weekly drop since July, a result of signals from the Federal Reserve pointing to potential rate cuts next year, while European central banks maintain their hawkish stance.
At 04:15 ET (09:15 GMT), the Dollar Index, gauging the dollar against a basket of six major currencies, indicated a 0.1% rise at 101.702, hovering close to the day’s earlier four-month low of 101.459.
It’s recorded a decline of over 2% for the week.
Impact of Fed’s Policy Shift
Both the European Central Bank and the Bank of England affirmed their commitment to retaining stringent policies through the upcoming year to counter inflation, maintaining unchanged interest rates in Thursday’s announcements.
The ECB highlighted no discussions around policy easing during the recent two-day meeting, while the BOE pledged to maintain elevated rates for the foreseeable future.
This stands in stark contrast to the Fed’s indication of potential rate reductions, likely continuing to keep the dollar under pressure as the year concludes.
Analysts at ING remarked, “Reflecting on the recent surge in central bank meetings, it seems European policymakers have resisted more than the Fed in terms of 2024 rate cut expectations.”
Market Focus on U.S. Data and Fed’s Williams
The upcoming U.S. economic releases include November industrial and manufacturing production figures and S&P PMI data. However, the primary attention will be on a speech by Fed policymaker John Williams, as markets seek clarity on the timing of the initial rate cut in this ongoing debate.
“If Williams hints at rate cuts, we anticipate the dollar to remain subdued today,” added ING.
Euro and Pound Retreat from Recent Highs
EUR/USD declined 0.3% to 1.0953, slightly below its two-week high of 1.1009 touched on Thursday. This followed PMI data signaling a downturn in German business activity for December, hinting at a potential year-end recession in the largest European economy.
The ECB is expected to lower its record-high interest rates soon. However, French central bank chief Francois Villeroy de Galhau suggested a rate cut is not imminent.
GBP/USD dipped 0.2% to 1.2747, after sterling surged to a four-month peak on Thursday, following a hawkish stance by the BoE.
“Among recent central bank meetings, the BoE notably resisted dovish sentiments, offering no cues for dovish expectations in 2024,” stated ING.
Stability in Yen Ahead of BOJ Meeting
In Asian markets, USD/JPY traded 0.1% lower at 141.75, with the Japanese yen maintaining stability near a four-month high against the dollar. Anticipations surround the Bank of Japan’s likely continuation of its extremely accommodative stance in its final meeting for the year next week.
USD/CNY traded 0.1% lower at 7.1035, following a massive injection of 1.45 trillion yuan ($200 billion) by the People’s Bank of China into the economy through its medium-term lending facility.
China’s Economic Indicators
China’s industrial production surpassed expectations in November, while retail sales and fixed asset investment lagged behind forecasts. This mixed data hinted at positive economic signs despite certain sectors missing estimates.
AUD/USD surged 0.3% to 0.6717, marking a more than four-month high for the Australian dollar, often considered a significant indicator of risk sentiment in Asia.