On Monday, the dollar was facing a fourth straight session of losses versus the euro as the market was pricing in a less aggressive Federal Reserve as more pessimistic remarks on European interest rates were made. The euro edged closer to its most recent nine-month peak of $1.08875, reaching $1.0870. If that area were to break, the spike top from last April at $1.0936 would be accessible.
It was helped by Klaas Knot, a member of the ECB’s governing council, who predicted that interest rates will increase by 50 basis points in both February and March and then continue to rise in the following months.
Since Knot is seen as a hawk among decision-makers, the comment was interpreted as a rebuttal to previous predictions that the ECB might pull down to quarter-point adjustments starting in March.
In contrast, futures have steadily decreased the expected peak for rates from the present range of 4.25% to 4.50% to 4.75% to 5.0%, pricing out nearly any possibility that the Fed will rise by 50 basis points next month. Due to weakening economic conditions, investors have also priced in approximately 50 basis points of U.S. rate reductions for the second half of the year.
This week’s scheduled flash surveys on manufacturing in January are expected to reveal stronger improvement in Europe than the US, in part due to declining energy prices.
If the most recent PMI surveys are to be accepted, the U.S. has lost its global growth leadership position, according to Ray Attrill, head of FX strategy at NAB. Meanwhile, since early December, gas prices have dropped by 60%, significantly lessening the negative terms of trade shock weighing on the Eurozone/EUR.
Furthermore, he continued, “U.S. inflation is seen declining farther and quicker than the Fed’s own estimates.” The USD has the potential to drop even more this year in this scenario.
According to Attrill, the euro will hit $1.1000 by March and $1.1700 by the end of the year.
Similar reasoning applies to the pound, with markets predicting that the Bank of England will increase interest rates by half a point to 4.0% at its policy meeting next week. The pound was up at $1.2410 and close to the previous week’s high of $1.2435. Thus, at 101.890, the dollar was slightly lower than a basket of currencies and barely above its most recent eight-month low of 101.510.
Having at least stabilized the yen following The Bank of Japan’s (BOJ) refusal to change its ultra-lax bond control policy in the face of market pressure. Analysts predict that the BOJ would maintain its position at least until the March policy meeting, notwithstanding the likely appointment of a new BOJ governor in February. The yen may rise once again if there is any indication the replacement will be less dovish than the current governor, Haruhiko Kuroda.
Following last week’s huge swings between 127.22 and 131.58, the dollar was now maintaining its position at 129.40 yen. The Bank of Canada’s meeting on Wednesday will be notable because of the interest rate debate because markets are expecting another quarter-point increase to 4.5%, but that will mark the end of the tightening cycle in that country.
The Canadian dollar was somewhat stronger at $1.3374 to the US dollar after recovering from $1.3497 on Friday when local Retail sales statistics turned out to be far less weak than anticipated.