Friday, 24 February 2023 / Published in Forex Perception

The common currency extended recent losses by falling below the $1,06 key support level this morning, for the first time since the early days of the year, giving up some significant gains of the latest rally, as the prospect of higher interest rate hikes from the Federal Reserve is favoring the dollar against the euro.

EUR/USD pair hit a six-week low of $1,0580 this morning after data released Friday showed that Germany, the Eurozone’s largest economy contracted at the end of the year, shrinking by 0.4% vs expected -0.2% in the fourth quarter of 2022 compared with the previous three months.

A lower-than-expected German Q4 GDP is a negative/bearish catalyst for the common currency, especially on a day like this today, which completed a year since Russia’s invasion of Ukraine, which tanked the EU economy.

Euro’s retracement from early February’s highs of $1,10 to the current lows is part of a broader rebalancing in the forex market in favor of the U.S. dollar against major G10 growth-sensitive currencies such as the Euro, Pound Sterling, and the Australian dollar as the market sentiment remains fragile amid fears of a more hawkish Federal Reserve to curb inflation.

Investors have increased their worries about more interest rate hikes by the Federal Reserve in recent weeks, following some stronger-than-expected U.S. macroeconomics, labor, and inflation readings, which are signs of resilience in the world’s largest economy.

The fundamentals are now favoring the dollar against the euro as investors braced for U.S. interest rates to be higher for longer, with the DXY-U.S. dollar index, which tracks the value of the greenback against six major peers, climbing over 104,70 this morning ahead of a reading on the PCE-Personal Consumption Expenditures index – the Fed’s preferred inflation gauge.

The PCE price index is a wide indicator of the average increase in prices for all domestic personal consumption and is widely expected to reiterate that U.S. inflation remained elevated in January.

Tuesday, 14 February 2023 / Published in Forex Perception

The U.S. dollar has posted a significant rebound across the board since February 01, 2023, gaining support from the stronger-than-expected U.S. macroeconomic data, the hawkish messages by the policymakers ahead of the key U.S. CPI- consumer inflation data due on Tuesday that might give more clarity over the Fed’s rate hike intentions.

More robust jobs data and solid economic readings saw markets last week have to recalibrate expectations for how high the Federal Reserve may need to raise rates this year to curb the record-high inflation.

On top of that, Federal Reserve speakers reiterated their hawkish messages that there is more work to be done to tame inflation, triggering a rebound on the dollar against other currencies.

Following a four-month downturn momentum, the DXY-U.S. dollar index which tracks the greenback against six major peers retreated from the multi-year high of 115 hit in late September 2022 to yearly lows of nearly 100 level at the end of January 2023.

DXY-U.S. dollar index, 2-hour chart

However, after the FOMC policy meeting on February 01, 2023, the dollar enjoys a strong rebound toward the 104 level, driven by the hot U.S nonfarm payrolls reading for January, the sharp bounce in the services ISM last month.

Surging yields give support on the dollar as well, with the yield on the 10-year bond bouncing from the lower end of its range that goes back to the middle of last September (3.30%) to the upper end near a five-week high of 3.75% on expectations for more rate hikes by the Fed.

CPI-inflation data due on Tuesday:

Investors look ahead to the well-expected January U.S. CPI consumer inflation data due on Tuesday that might provide more cues on monetary policy and the price trajectory of the dollar.

While the reading is expected to show further easing in inflation in January 2023 to 6.2% vs 6.5% in December 2022, it is still expected to remain relatively high, which could invite more interest rate hikes by the Federal Reserve.

Monday, 06 February 2023 / Published in Forex Perception

A risk-off mood dominates financial markets on the first trading day of the week, with the U.S. dollar rebounding across the board, while the risk-sensitive currencies are retreating from the recent multi-month highs after a hot US jobs report on Friday last week could provide more room for the Federal Reserve to continue tightening interest rates to combat inflation.

The investment sentiment has soured since last Friday, with investors having a more defencing approach and taking some profits out of the latest four-month rally.

The DXY-U.S. dollar which tracks the value of the greenback against six major peers has rebounded above the 103 mark this morning for the first time since mid-January 2023, getting support from a strong U.S. non-farm payroll report, and higher bond yields.

DXY-U.S. dollar index, 2-hour chart

On Friday, the U.S. Labour Department announced that NFP-nonfarm payrolls surged by 517,000 jobs in January vs the 185,000 market expectation. Combined with the rebound in the service industry in the same month, it triggered anxiety among investors regarding the outlook on the Fed’s monetary policy.

The unexpected spike in the labour data has shown that U.S. employment remains strong and resilient despite the slowdown in economic activity, the record-high inflation, and the growing fear of a recession.

The better-than-expected macroeconomics and employment data give the Federal Reserve more headroom to stay hawkish for longer and hike the rate by another two times this year, which could weigh heavily on the dollar price trajectory and sentiment on other risky assets.

The recovering dollar is causing significant losses across the board, with the Euro falling back from recent highs of $1.10 toward $1.0750, the Pound Sterling retreating from $1.24 to $1.20, the Japanese Yen falling from ¥128 to above ¥132, while the risk-sensitive Australian dollar is trading below $0.69 level after touching a six-month high of $0.7150 last week.