Forex
Dollar trades in tight range ahead of key U.S. inflation release
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Investing.com – The U.S. dollar edged lower Wednesday, trading in a tight range with traders on edge before key U.S. inflation data that could influence the future path of interest rates.
At 04:35 ET (09:35 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 102.147, after gaining 0.2% on Tuesday.
U.S. CPI set to drive dollar sentiment
The dollar has rebounded from December’s 2% fall as the traders have chosen the new year to reassess the likely speed and magnitude of the interest rate cuts most expect the Federal Reserve to deliver in 2024.
The Fed’s surprising dovish tilt in December has resulted in the market projecting around 150 basis points of cuts this year, but this is reliant on inflation continuing to retreat.
This brings Thursday’s December release firmly into focus, as it is likely to drive market sentiment until the next Fed meeting at the end of this month.
The headline figure is expected to rise 0.2% on the month, an annual rise of 3.2%, just up from 3.1% the prior month. However, the core figure, which excludes volatile food and energy prices, is expected to fall to 3.8% on an annual basis, the lowest since mid-2021.
A speech by New York Fed President will also be studied carefully later in the session, as the influential policy maker has been on the hawkish side of the rate cut debate.
Euro helped by French industrial production
In Europe, traded 0.2% higher at 1.0947, with the single currency helped by data showing that rose 0.5% on the month in November, an improvement from the fall of 0.3% in the prior month.
That said, this presented a rare piece of good news from the region, with European Central Bank Vice President saying earlier Wednesday that the eurozone may have been in recession last quarter and prospects remain weak.
The European Central Bank has tried to make the case for keeping interest rates at record highs for some time, but is likely to come under pressure to ease monetary policy in the near future.
rose 0.1% to 1.2721, with Bank of England Governor set to testify before the U.K. Parliament later in the session on the financial stability report published in December.
“Any reference to the future path of monetary policy may follow the tone of the latest BoE meeting, where Bailey focused on pouring cold water on rate cut bets,” said analysts at ING, in a note.
Yen weakens close to 145 mark
Elsewhere, traded 0.3% higher to 144.94, inching closer to the 145 mark as traders grew more convinced that the will delay a pivot away from its ultra-dovish policies, particularly in the wake of the recent devastating earthquake in central Japan.
traded largely flat at 7.1682 ahead of key and later this week, which is expected to show little improvement in Asia’s largest economy.
rose 0.4% to 0.6710, as data showed eased in November, but still remained well above the Reserve Bank’s 2% to 3% annual target.
On Monday, Bank of America (BofA) provided insights into the potential actions of Commodity Trading Advisors (CTAs) in the coming week.
According to BofA, CTAs might continue to sell the U.S. dollar (USD) against most currencies following a trend that emerged after the Consumer Price Index (CPI) report led to a weakening dollar. The bank’s models indicate that USD long positions have been reduced this week.
The bank’s analysis suggests that in the foreign exchange (FX) market, CTAs are likely to persist with short covering in the euro (EUR), British pound (GBP), and Canadian dollar (CAD).
Additionally, there is an expectation for CTAs to increase their recently established long positions in the Australian dollar (AUD) and potentially initiate a long position in the Mexican peso (MXN), given the positive trend strength for the peso.
In the commodities sector, despite an increase in the price of gold last week, the trend for the precious metal declined, prompting CTAs to sell, albeit at a slower pace. BofA anticipates that this trend of selling gold and oil will continue into the next week.
The analysis also noted that CTAs’ long positions in are nearing extremely high levels, while long positions in aluminium are being unwound. In contrast, soybeans are experiencing short covering.
The bank’s report serves as a gauge of how trend-following traders might adjust their portfolios in response to market movements.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
On Monday, Bank of America (BofA) analysts provided insights into the current state of G10 foreign exchange (FX) markets, noting a general sentiment of disappointment among investors due to the markets’ lack of volatility.
Despite a recent reversal in the U.S. dollar (USD), major currency pairs have not moved significantly, staying within their established ranges. BofA anticipates further depreciation of the USD, yet it emphasizes that the currency’s movements are expected to remain close to year-end consensus forecasts.
The analysis highlighted that while markets have expressed a desire for more excitement in G10 FX trading, they must come to terms with the inherent trade-off between carry trade opportunities and higher volatility. Carry trades, where investors borrow in low-yielding currencies to invest in higher-yielding ones, have been identified as a dominant trend post-global financial crisis.
However, this strategy tends to reduce market volatility, leading to what BofA describes as an “uninspiring” and “stuck in the mud” trading environment.
BofA’s commentary suggests that the pursuit of carry as a passive strategy has been a factor in dampening volatility in the FX markets. The firm underscores that investors should not expect both high carry returns and high volatility, as these market conditions are typically mutually exclusive. The lack of clear fundamental trends in G10 FX has been a source of frustration for markets, but the current trend of carry is clear, even if it leads to lower volatility.
The analysts also touched upon the anticipation around the next batch of U.S. data, which many investors hope might shift the narrative. However, BofA indicates that such expectations may be overly optimistic. The firm’s message to the markets is to adjust expectations and accept the current dynamics, with the USD continuing to play a central role in the G10 FX space.
In summary, BofA’s analysis points to a continuation of the recent patterns in G10 FX markets, with a slight downward trend in the USD value but within the bounds of recent trading ranges.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com – The U.S. dollar is trading in a calm fashion against the majors of late, and these narrow ranges will likely stay for a while longer, according to Goldman Sachs, with divergence having to wait.
AT 05:20 ET (09:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded unchanged at 104.330, steadying after losing around 1% last week in the wake of soft U.S. inflation data.
“We think there is only limited room for the market to press Dollar shorts on the back of the inflation news,” said analysts at Goldman Sachs, in a note dated May 17.
“After all, while the prints were mostly in line with expectations, they were not in line with the target. As a result, the news does not change the policy outlook much beyond reinforcing the recent rhetoric.”
The subsequent market response has been reminiscent of the post-March FOMC FX reaction, when the response to ‘dovish dots’ stalled not because of fresh data, but instead because FX is still a relative game, and the Dollar fundamentals have not shifted much, the investment bank added.
And, this time around, we think the rally in front end rates looks more consistent with cyclical concerns rather than dovish expectations.
“That matters for FX because there is a narrow path for the Dollar to depreciate on a broad basis when growth is softening,” the bank added. “This is especially true in the current environment when faster Fed cuts would likely be met with easier policy abroad as well.”
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