Dec 21, 2023: The dollar experienced a dip on Thursday, while sterling faced losses in light trading conditions, anticipating the crucial U.S. inflation figures slated for Friday.
Sterling encountered a significant drop against the dollar following the release of British inflation data that fell below expectations, hitting an annual rate of 3.9% in October, marking a two-year low. Amid this, traders are factoring in potential Bank of England rate cuts as early as May, leading to a 0.7% fall to $1.2638. The pound touched a one-week low of $1.2613 on Thursday before recovering slightly with the softened dollar, reaching $1.2669 eventually.
Against the euro, the pound reached its lowest level in over three weeks at 86.78 pence, while also observing losses against the Australian dollar and the yen.
Market analysts anticipate a similar downtrend in the U.S. core personal consumption expenditure (PCE) data on Friday, expecting the annual inflation rate to drop to 3.3%, its lowest since 2021.
The dollar index, comparing the currency against six others, including the pound, showed a 0.4% decline, resting at 102.01.
According to Dominic Bunning, head of European FX research at HSBC, the market is leaning toward a ‘Goldilocks-type’ scenario, anticipating a soft landing, which often results in dollar depreciation. He notes the difficulty in opposing this trend in the short term.
Month-end rebalancing alongside thin trade conditions is also seen as a contributing factor to the dollar’s downward trend, say some analysts.
While Wall Street witnessed substantial selling in the final hour of Wednesday’s equity trading, generating a ripple of risk aversion in the market, the safe-haven yen saw a boost. Japan’s elevation of its fiscal year growth projection to 1.6% further bolstered the yen, which gained about 0.6% and traded at 142.725 per dollar.
The yen, however, remains down over 8% against the dollar for the year, influenced by the Bank of Japan’s persistent maintenance of negative short-term rates, despite a 300 basis point difference in U.S. interest rate hikes.
Goldman Sachs analysts emphasized the BoJ’s retention of its easing bias in the last meeting, suggesting that the market’s anticipation for early actions in the new year might be overly aggressive.
The euro gained 0.4% to $1.0986, while the Australian and New Zealand dollars traded slightly below Wednesday’s five-month highs.
