The US dollar steadied in Wednesday trading after recovering sharply from its lowest level in nearly four years, while the euro inched higher as investors awaited crucial inflation data from the Eurozone. The foreign-exchange market is entering a cautious phase as traders weigh upcoming economic releases and potential shifts in global monetary policy.
Currency markets are currently driven by expectations surrounding the Federal Reserve’s leadership transition, the European Central Bank’s next move, and a series of economic indicators that could reshape interest-rate outlooks on both sides of the Atlantic.
At 04:05 ET (09:05 GMT), the US Dollar Index (DXY), which tracks the greenback against a basket of six major currencies, slipped 0.1% to 97.245. Despite the minor pullback, the index remains up more than 1% over the past week, reflecting resilient demand for the US currency.
The dollar’s recovery began late last week following the nomination of Kevin Warsh as the next Chair of the Federal Reserve. Market participants view Warsh as less inclined toward aggressive monetary easing than previously expected, a stance that could support the dollar in the medium term.
Traders are closely monitoring whether Warsh will be confirmed by the US Senate and what his appointment could mean for interest-rate policy when he replaces Jerome Powell in May. Any hint of a more hawkish Fed trajectory would likely boost the greenback further.
A brief US government shutdown appeared to have little impact on the currency after lawmakers approved additional funding this week. However, the episode has delayed the release of the closely watched non-farm payrolls report, originally scheduled for Friday.
Attention will instead shift to other indicators due later in the session, including the ADP private payrolls report and the ISM services index, which should provide fresh clues about the strength of the US economy.
Analysts at ING noted: “The balance of risks is slightly tilted to the upside for the dollar today. Positive data could act as a catalyst for further USD recovery given the supportive macro backdrop.”
In Europe, EUR/USD rose 0.1% to 1.1826 as markets prepared for the release of preliminary January inflation figures for the Eurozone.
Consumer prices in the currency bloc are expected to have eased to 1.7% year-on-year, comfortably below the European Central Bank’s 2% target. The ECB is widely anticipated to keep interest rates unchanged at 2% for a fifth consecutive meeting.
However, significantly weaker-than-expected inflation could raise concerns among policymakers. Several ECB officials have recently warned that the rapid appreciation of the euro against the dollar risks pushing inflation even lower and undermining the region’s economic recovery.
The euro touched a 4½-year high of 1.2084 against the dollar last week before retreating.
ING commented:
“EUR/USD has rebounded to around 1.183, trading roughly 0.8% above our estimate of short-term fair value. If US data proves relatively strong today, we could see pressure for a move back below 1.180 in the coming days.”
The British pound gained ground, with GBP/USD rising 0.3% to 1.3729. The Bank of England is widely expected to keep its benchmark rate unchanged at Thursday’s policy meeting as inflation moderates and growth shows signs of slowing.
In Asia, USD/JPY climbed 0.4% to 156.43, close to a two-week high. The yen came under renewed pressure following comments from Prime Minister Sanae Takaichi, which raised questions about whether Tokyo would intervene in currency markets to support the Japanese currency.
Investors are now focused on the snap lower-house election scheduled for February 8. Takaichi’s party is expected to secure a strong victory, potentially giving her greater influence over Japan’s economic and monetary policies.
USD/CNY slipped to 6.9372, near its lowest level since mid-2023
AUD/USD advanced 0.3% to 0.7037 after a hawkish surprise from the Reserve Bank of Australia
The RBA raised interest rates by 25 basis points and upgraded its growth and inflation forecasts, propelling the Australian dollar to one of the week’s best performances.
Analysts believe the next phase of currency trading will hinge on three major factors:
The Federal Reserve’s policy direction under Kevin Warsh
Eurozone inflation and the ECB’s response
Political developments in Japan and the UK
Stronger-than-expected US data could extend the dollar’s rebound, while soft Eurozone inflation might pressure the ECB toward a more accommodative stance, weighing on the euro.
Movements in the US dollar this week highlight the tug-of-war between expectations of a firmer Federal Reserve and mixed economic signals from Europe and Asia. Currency markets are entering a pivotal period as investors await key data releases and central-bank guidance.
Traders are advised to keep a close eye on the ADP payrolls, ISM services figures, and Eurozone inflation report for clearer direction. Any surprises from these indicators could trigger sharp volatility across major currency pairs in the days ahead.
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