Forex
Dollar stable ahead of PCE data; euro edges higher, yen slips
Investing.com – The U.S. dollar steadied in early European trade Friday ahead of the release of key inflation data, the euro edged higher while the Japanese yen slipped slightly but remained on course for its strongest week in three months.
At 04:00 ET (09:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded largely unchanged at 104.127.
Dollar looks to PCE release
The dollar found some support from data showing the expanded faster than expected and inflation slowed in the second quarter.
The reading pushed up hopes that the U.S. economy was headed for a soft landing, where growth will remain steady while inflation eases.
However, the dollar gains were limited, with U.S. macro not the only driver in the foreign exchange markets these days.
“The fallout of the tech sell-off, frontloaded US election positioning, and the unwinding of carry trades have generated moves large enough in magnitude to out shadow U.S. data,” said analysts at ING, in a note.
That said, the focus Friday is now squarely on data, due later in the session, which is expected to show inflation eased further in June, keeping intact expectations for a September cut.
Euro drifts higher
In Europe, edged marginally higher to 1.0845, after data showed that consumers in the eurozone stopped reducing their inflation expectations in June after four consecutive monthly falls.
The ECB’s Consumer Expectations Survey showed the median consumer expected inflation to average 2.8% over the next 12 months, stable from May after a steady fall from 3.3% in January.
The ECB cut interest rates in June and is widely expected to do so again in September, but the policymakers would undoubtedly prefer these expectations to continue to fall as they loosen monetary policy.
traded 0.2% higher at 1.2870, but well below the one-year high of 1.3044 hit last week.
The meets next week, and while markets are anticipating around 50 bps of cuts this year, there remains a great deal of uncertainty over whether the policymakers will agree to rate cut then or delay until September.
Yen looks to next week’s BOJ meeting
In Asia, rose 0.2% to 154.25, with the yen’s recent advance somewhat stalled by soft , which showed inflation remained largely muted in July.
The soft inflation reading came just days before a meeting, with analysts split over whether the central bank will have enough headroom to hike interest rates by 10 basis points.
However, the yen was on track for a 2.5% rise for the week, its biggest weekly gain since late April-early May, after suspected intervention boosted the currency.
rose 0.3% to 7.2520, with the yuan retreating after suspected intervention by the Chinese government saw the currency appreciate sharply against the dollar on Thursday.
Investing.com– The Japanese yen exhibited minimal movement on Tuesday, despite Bank of Japan (BOJ) Deputy Governor Ryozo Himino indicating a potential hike in the upcoming policy meeting.
Himino suggested that the central bank might consider raising rates, citing sustained wage growth and expectations of a clearer U.S. policy landscape following President-elect Donald Trump’s inaugural address later this month.
The yen’s pair edged 0.1% higher to 157.62 yen on Tuesday.
In recent months, the BOJ has been adjusting its monetary policy to address rising inflation. In March last year, it ended its negative interest rate policy, and by July, it had increased the short-term policy rate to 0.25%.
These measures aim to achieve a stable 2% inflation target, supported by robust wage growth and a weakening yen, which have contributed to higher import costs.
Despite these developments, the yen’s exchange rate against the U.S. dollar remained relatively stable, reflecting market skepticism about the likelihood of an imminent rate hike.
Analysts suggest that while the BOJ is signaling a shift towards policy normalization, uncertainties surrounding global economic conditions and domestic wage dynamics may lead to a cautious approach.
Barclays (LON:) expects the central bank to implement rate hikes in March and October, with a terminal rate of 0.75%.
The BOJ’s next policy meeting is scheduled for January 23-24, where new growth and price projections will be discussed.
Investing.com — UBS strategists expect the US dollar “to stay stronger for longer,” citing robust US economic activity and ongoing tariff concerns impacting other regions.
Monday saw the (DXY) soar to its highest level since November 2022, trading above the 110 mark during the session. This represents a roughly 9% appreciation since late September.
The US dollar’s recent strength has been bolstered by better-than-expected domestic data, including nonfarm payrolls and the services sector purchasing managers’ index. These positive indicators have led to a decrease in the anticipated number of Federal Reserve rate cuts this year, with the consequent rise in US yields lending broad support to the USD.
While US economic data is expected to remain solid in the near term, the outlook for Europe is less optimistic, with subdued growth prospects.
Although growth in China is forecasted to accelerate to 5% year-over-year for the fourth quarter, the threat of US tariffs poses a significant risk. Political and economic uncertainties in South Korea, the European Union, and the UK have been linked to weakness in their respective currencies.
According to UBS, potential monetary policy divergence is among the key factors that could further propel the dollar upward in the near term.
While the Fed is expected to cut rates by a total of 50 basis points in the second and third quarters, the European Central Bank is projected to reduce rates by 100 basis points in the first half of the year.
“Policy divergence is a powerful driver of currencies, which leads to trending FX markets and the potential for overshooting exchange rates,” strategists led by Mark Haefele wrote.
The firm also points out that tariff risks may not be fully accounted for in the current USD valuation. Despite the dollar’s recent rally being largely attributed to solid US macroeconomic data, the introduction of new tariffs could drive the dollar even higher.
UBS suggests that if tariffs are implemented, the DXY could trade between 110 and 115, with significant impacts on other major currency pairs.
“If tariffs were to materialize, DXY could trade in a 110-115 range, could drop below parity, could slide below 1.20, and could move toward 0.94, in our view,” strategists noted.
However, the investment bank believes that the story of 2025 could be a tale of two halves, with the dollar strength in the first half of the year potentially reversing in the second half.
The current trading position of the USD, which is considered strongly overvalued and shows the highest level of dollar net length since 2015, supports this view.
UBS’s revised forecasts for the EUR/USD pair reflect this expected trajectory. Strategists expect the pair to trade at 1.00 in March, 1.02 in June, and 1.06 in December 2025.
In the case of China, despite the possibility of dramatically higher effective tariff rates, the CNY has only partially priced in this risk, with UBS reiterating its forecast for the to reach 7.50 by June.
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