“The forex dollar’s recent rally faces resistance as market awaits crucial data, including treasury yields and Federal Reserve’s stance on interest rates. Analysts remain cautious amid expectations of rate cuts, despite solid U.S. economic indicators. Meanwhile, sterling strengthens on upbeat UK housing data.”
Despite market speculations of a Fed rate cut in March rebounding, the dollar retreated from its nearly three-month peak against the euro on Tuesday. Treasury yields, often influencing the dollar’s strength by attracting foreign investment, also experienced a downturn.
Brad Bechtel, Jefferies’ global head of fx, remarked that the dollar’s surge appeared to be excessive, echoing the sentiment toward U.S. yields. He noted a rapid ascent meeting resistance levels.
Against the euro, the dollar dipped by 0.14% to $1.0769 after a slight setback on Tuesday, having previously touched its strongest position since November 14 at $1.0722.
The dollar index, gauging the U.S. currency against six major counterparts, including the euro, slipped 0.08% to 104.06, following a 0.29% decrease a day earlier. It had peaked at 104.60 on Monday, the highest level since November 14.
Bechtel suggested that forthcoming data would steer the market’s direction. In the interim, he anticipated potential consolidation, a dollar pullback, and probable gains for the euro and sterling.
Technical factors contributed to the dollar’s retracement after a two-day surge against the euro, stimulated by unexpectedly robust U.S. employment figures and more hawkish statements from Federal Reserve Chair Jerome Powell, which dampened expectations of an imminent rate cut.
U.S. Treasury yields experienced a reprieve on Wednesday after retreating from recent highs due to solid demand during the sale of new three-year notes, weakening support for the dollar.
Jane Foley, Rabobank’s head of FX strategy, noted the market’s reluctance to fully commit to a long U.S. dollar trade despite diminished expectations for a March rate cut, citing anticipations of cuts later in the year.
Traders now assess a 23.5% probability of a rate cut in March, compared to 14.5% on Monday, according to the CME Group’s FedWatch Tool. At the outset of the year, the odds stood at 68.1%.
Despite a sharper-than-anticipated decline in industrial production in the eurozone’s largest economy, the euro remained unaffected, as per Chris Turner, ING’s global head of Markets, who noted that Germany’s industrial challenges were widely acknowledged.
Against the yen, the dollar inched 0.04% higher to 147.99, after a 0.49% drop on Tuesday. This currency pair tends to be particularly sensitive to Treasury yield movements.
James Kniveton, Convera’s senior corporate forex dealer, observed a recalibration of expectations for Federal Reserve policy in financial markets. He suggested that persistent positive economic data, particularly concerning inflation, could shift sentiment towards earlier rate cuts, potentially weakening the greenback further.
Sterling climbed 0.29% against the dollar to $1.2633 following an uptick in British house prices, bolstering speculation that the Bank of England (BoE) would refrain from near-term interest rate cuts.