Dollar Pushes Higher on Hints of Cooler Rate Winds

16 Jan 2024 , 09:58 AM

Tuesday saw the dollar remain stable as investors evaluated the likelihood of an early and significant reduction in interest rates from the Federal Reserve. This was in front of a week full of data that may have an impact on the monetary policy decisions of major central banks.

The statistics revealed that Japan’s wholesale inflation slowed for the 12th consecutive month in December, remaining flat from a year earlier, which caused the yen to fall marginally to 145.89 per dollar.

The results imply that consumer inflation increases will slow down in the upcoming months, relieving pressure on the Bank of Japan (BOJ) to quickly phase out its enormous stimulus program.

The yen strengthened near the end of 2023, rising 5% versus the dollar in December on expectations of a change in BOJ policy. Since then, it has drastically decreased, down 3% for the month of January.

At the beginning of the year, investors reduced their expectations of early rate cuts from the Fed. However, data released last week revealed an unexpected decline in U.S. producer prices in December, supporting the idea that cuts could occur as early as March.

According to the CME FedWatch Tool, markets are now pricing in a 70% possibility of a 25 basis point (bps) decrease in March, up from 63% a week earlier. After expecting cuts of 140 basis points last week, traders are now anticipating cuts of 160 basis points this year.

Due to Monday’s public holiday in the US, the dollar saw a 0.2% increase in overnight trading against a basket of currencies. However, it then surged 0.234% to 102.88.

This week will be jam-packed with statistics, starting on Wednesday with updates on U.S. retail sales, British inflation, and China’s fourth-quarter GDP.

Investor focus will also be on remarks made by central bank officials, such as Christopher Waller of the Federal Reserve, whose shift to a more dovish stance in late November helped send markets surging to an explosive year-end gain. Waller is scheduled to speak on Tuesday evening.

The yield on U.S. Treasury notes with a maturity of two years increased by 6.1 basis points to 4.199%, while the yield on notes with a maturity of ten years increased by 4.4 basis points to 3.994%.

The day’s rise in the dollar had a negative impact on most major currencies. The euro dropped 0.28% to $1.0917, marking the greatest percentage decline in a single day in the previous two weeks. For the month, the value of the one currency is down 1%.

In the meanwhile, this week’s jobs and inflation statistics will be the main focus for sterling speculators as they adjust their interest-rate forecasts. The pound was last at $1.2687, down 0.30% on the day, and moving away from a nearly five-month high of $1.2825 vs the dollar achieved late December.

The Bank of England is expected to decrease rates by 120 basis points in 2024; the first cut is most likely to occur in May.

In other news, the New Zealand dollar dropped 0.39% to $0.6176 and the Australian dollar dropped 0.43% to $0.6632.

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