- The dollar ended last week lower, snapping its six-week winning streak.
- US data revealed softer-than-expected underlying price pressures.
- The dollar rebounded as markets awaited Trump’s speech.
Currency futures were mixed on Friday amid economic data from different countries and anticipation of Trump’s inauguration speech. Meanwhile, the greenback eased after downbeat economic data and slightly dovish Fed remarks. By Monday, they fell as the dollar rebounded ahead of Trump’s speech.
The dollar ended the week lower, snapping its six-week winning streak as Fed rate cut expectations increased. During the week, market participants absorbed inflation and retail sales data, which pointed to a slowdown in the economy.
Consumer inflation figures on Wednesday revealed softer-than-expected underlying price pressures. This rekindled Fed rate cut bets, weighing on the dollar and Treasury yields. A separate report revealed that retail sales came in below estimates, indicating soft consumer spending.
Elsewhere, Fed Governor Christopher Waller noted that three or four rate cuts were still possible this year. His dovish remarks weighed on the dollar. By the end of the week, market participants were pricing 40-bps of rate cuts this year. However, the focus shifted away from data to Trump’s inauguration.
Dollar vs peers (Source: Bloomberg)
On Monday, the dollar rebounded as markets awaited Trump’s speech. It has risen over 4% since he won the election. Traders are waiting to see whether he will implement his policy proposals on tax cuts and import tariffs. An aggressive start to his term will be bullish for the dollar, likely boosting the US economy. At the same time, inflation might increase, reducing expectations for Fed rate cuts. This would force the central bank to keep interest rates at restrictive levels. On the other hand, currency futures will suffer.
The pound dropped on Friday after downbeat retail sales data. This followed a poor GDP report that all pointed to a slowing economy. Consequently, Bank of England rate cut expectations increased.
Meanwhile, the Canadian dollar collapsed as traders feared the impact of Trump’s tariffs on Canada’s economy. Trump has proposed a 25% tariff on goods from Canada. If he implements it, demand for Canadian goods will drop, and the economy will deteriorate. Therefore, the Bank of Canada would be under immense pressure to lower borrowing costs.
On the other hand, the yen remained steady against the dollar as markets bet on a Bank of Japan rate hike this week. BoJ policymakers have taken on a more hawkish tone ahead of Trump’s administration. A rate hike will support the yen against a strong dollar.
