Friday, March 31, 2023

EUR/USD: Dollar Steady Ahead Of PCE Data

The dollar edged up slightly in European Friday trading, but is still headed for a weekly loss. There were no…

By Editorial , in Latest , at January 28, 2023

The dollar edged up slightly in European Friday trading, but is still headed for a weekly loss. There were no major moves, however, as the market consolidated on expectations of a smaller rate hike at next week’s Federal Reserve meeting.

The publication of somewhat stronger than expected growth data for the fourth quarter from the USA on Thursday changed little in this calculation. Real consumer spending slowed more than expected, and the quarterly personal consumption spending index also fell surprisingly sharply.

Inflation is Still Well

“While inflation is still well above target and unemployment is at cyclical lows, there is some evidence that the economy is responding to tighter monetary policy. The Fed will be aware of the risk of too strong and rapid a interest rate hikes could plunge the economy into recession,” ING analysts said in a statement.

Consensus is now firmly in favor of the Fed raising the target range for interest rates by just 25 basis points next week, having already switched from a 75 basis point step to a 50 basis point step at its last meeting in December . This afternoon, the Fed’s preferred index of inflation, the core index of personal consumption spending, is still on the agenda.

Shifting expectations of Fed policy supported European FX all week as both the European Central Bank and Bank of England are widely believed to need even more interest rate hikes to rein in inflation.

The first gross domestic product (GDP) data for the fourth quarter is beginning to come in from the eurozone. Spain announced on Friday that its economy grew by 0.2% during the period, in line with analysts’ expectations. Data from Germany, France and Italy – the euro zone’s three largest economies – is expected next week. The Deutsche Bundesbank has already announced that it expects the German economy to stagnate.

As of 12:40 GMT, the euro was down 0.05% to $1.0884, while the dollar index, which tracks the euro against a basket of six developed market currencies, rose 0.06% to 101.69.

Abroad, most attention is likely to be on Pakistan, where the rupee fell around 10% on Thursday. The central bank, under pressure to protect its dwindling foreign exchange reserves, abandoned attempts to defend the exchange rate against the dollar. The country was devastated by floods last year, wiping out much of the agricultural sector and also hitting industry hard.

Exchange rate liberalization was a key condition for the International Monetary Fund resuming disbursements under a $7 billion financing package that was suspended last year.

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