The U.S. Dollar Index or it is also known as DXY, edged up about 0.2 percent in the New York session yesterday. Then it was floated in the 101.70s range in this morning's open (January 27/27).
The release of the United States Gross Domestic Product (GDP) preliminary data for the fourth quarter of 2022 exceeded market estimates. This was supporting the Fed's plan to maintain a hawkish stance at the beginning of this year.
Unfortunately, these data have not been able to boost the greenback rapidly. The situation was slowing down, but it is better than market’s expectation.
The results of the FOMC meeting at the end of last year revealed the Fed's plan to "rate hike" about 2 more times in 2023. Then it also keeps the interest rates above the 5% rate until the end of the year.
Federal Reserve may cut the Rates
Market participants cast doubt on these projections in light of signs of a sharpening the America’s economic slowdown. Some analysts even signal the Fed should cut rates in the second half.
However, some U.S. economic data released last night sided with the Fed's projections. The Department of Commerce in America reported that GDP grew by 2.9 percent.
It was for quartef-over-Quarter Period in the fourth quarter of 2022. That's lower than the 3.2% growth in the previous period. However, still better than the consensus estimate of just 2.6%.
Weekly jobless claims data also outperformed expectations. The United States Department of Labor reported that the number of jobless claims decreased to 186k in the week ended Jan. 21.
US Economic Data is Mixed
That's less than the previous 192k claims, as well as the consensus estimate pegged at 205k. A somewhat mixed picture is shown by the United States economic data.
It was said by Stuart Cole, a chief macro economist at London's Equiti Capital. However, the biggest contributor to this growth story is inventory, a component that will almost certainly weaken throughout 2023.
Cole thinks that U.S. economic data this time supports expectations of a 25 basis point Fed rate hike for now. The presence of these data put the brakes on the slump in the US dollar index for a while.
The market's next attention will turn to several major central banks. Their policies will become an essential factor which can affect the currency pairs movement in the market.
The Recession and Central Bank Policy Conundrum
The three major central banks will hold regular meetings next week. Those are the Federal Reserve, the Bank of England (BoE), and the European Central Bank (ECB).
The market believes that BoE and ECB will both raise interest rates by as much as 50 basis points, or it is greater than the Fed. Those expectations support the current EUR/USD and GBP/USD rates.
However, traders will likely pay more attention to the details in the results of the central banks' meetings than the announcement of interest rates. Meanwhile, a number of analysts continue to maintain their dovish expectations.
That is especially over the outlook for the US economy. This is likely to be the last with strong economic growth quarter for some time, especially since the details are not very encouraging.
Some Hard Data are Already Weak
The analysts still expect the US economy to fall into recession due to the Fed's jumbo rate hike. This was said by Dr Christoph Balz, a senior economist at Commerzbank.
Balz added that a number of December's 'hard' data such as retail sales and industrial production are already very weak. It could be a signal that the economy is losing momentum significantly.
Survey-based indicators such as the ISM PMI are also pointing down sharply. The Bank of Canada (BoC) announcement yesterday officially marked it as the first major central bank to end the post-pandemic rate hike cycle.
The USD/CAD briefly stuck out into the 1.3420s following the announcement. However, this pair then mired again into the 1.3300s.
