- The dollar paused its recent rally, ending the week down.
- The pound rose on Friday and recorded its first weekly gain against the dollar.
- The yen strengthened on Friday but remained the worst-performing G10 currency.
Currency futures strengthened on Friday as the dollar paused its recent rally, ending the week lower. The dollar has been climbing for two months as markets scale back expectations of Fed rate cuts. Initially, investors had expected the first rate cut to occur in March this year. However, US economic data has consistently come in higher than expected, pushing back expectations for the first rate cut to June.
Dollar (Source: Bloomberg)
Moreover, markets had predicted nearly 175 bps of rate cuts in 2024. However, this has gradually declined, coming close to the Fed’s projection of 75 bps. After such a strong rally, the dollar paused for several reasons. Firstly, investors await more economic data for clues on the Fed’s next move. The next big report is the core PCE price index, coming on Thursday.
Secondly, the market had improved risk appetite, with risk assets like equities rising globally. As a result, there was less demand for the dollar. Analysts believe that the dollar will eventually decline as the Fed is set to start cutting rates in the second half of the year. However, the dollar might keep rallying if the US economy shows resilience.
The pound rose on Friday and recorded its first weekly gain against the dollar due to solid British economic data and an improved risk appetite. According to the data, the services sector experienced strong growth while business optimism in the UK soared. However, consumer sentiment fell for the first time in four months. The pound also got support from an improved risk appetite as Nvidia’s upbeat earnings led to a rally in equities.
Recent data from the UK has revealed persistent inflation pressures. As a result, analysts believe the BoE will keep delaying rate cuts. BoE’s Megan Greene said she needed evidence that inflation was easing before reducing interest rates.
Meanwhile, the yen strengthened on Friday but remained the worst-performing G10 currency, weakening significantly against the dollar. The yen recorded a fourth week of losses due to interest rate differentials.
Lastly, despite positive data, the euro was nearly flat against the dollar on Friday. The data on German business morale was positive. However, Germany’s economy remains vulnerable to another recession. Elsewhere, ECB president Christine Lagarde said soft Q4 wage data was encouraging. However, the ECB needs more evidence of slowing inflation.
