Overview
The U.S. dollar ticked up on Tuesday as American investors returned from the George Washington’s birthday holiday and attention turned to a batch of U.S. economic releases expected to influence monetary policy expectations.
At 04:30 ET (09:30 GMT), the Dollar Index - which measures the U.S. currency against six peers - was trading 0.2% higher at 97.010, following a 0.2% rise in the previous session. Large parts of Asia, including China, remained closed for a holiday, limiting regional market activity.
Drivers and near-term focus
Analysts at ING noted that the holiday-related quiet in trading helped the dollar find support, pointing to what they described as a "stretched USD short-term undervaluation that by itself justifies some USD gains on calm days." The market is now focused on a schedule of U.S. releases, foremost among them the minutes from the Federal Reserve’s January policy meeting due on Wednesday.
The Fed minutes follow a meeting in which policymakers left interest rates unchanged but cautioned that risks to inflation and the labor market persist. Since that decision, U.S. data has provided mixed signals, with payrolls and consumer inflation readings delivering uneven cues on the economy’s direction.
ING highlighted a few items likely to draw attention this week: the ADP weekly payrolls report, which may be read against the backdrop of softer readings for the 10-24 January period, and the Empire Manufacturing index, where expectations point to a decline to the low sixes. The U.S. personal consumption expenditures (PCE) price index for December - the Fed’s preferred inflation gauge - is due on Friday and is viewed as particularly important for gauging longer-term interest rate expectations.
Sterling weakens after U.K. labor data
In Europe, sterling slid against the dollar, with GBP/USD down about 0.3% at 1.3594. The move came after the Office for National Statistics reported a further softening in the U.K. labor market: the unemployment rate rose to 5.2% in the three months to December from 5.1% the prior month, marking the highest reading since early 2021.
At the same time, pay growth excluding bonuses slowed to an annual 4.2% in the three months to December, down from 4.5% in the preceding month. ING noted that if these trends persist into March data, they would increase the likelihood of a Bank of England rate cut next month.
Euro, yen and other FX moves
EUR/USD traded marginally lower, down about 0.1% at 1.1846 ahead of the release of the latest German ZEW economic sentiment index, which is expected to show further improvement in confidence in the eurozone’s largest economy. ING said it remained slightly biased to the downside for EUR/USD for the remainder of the week, citing room for the dollar to recover on short-term fundamentals and maintaining a baseline view of a test of 1.1800 soon.
In Asia, USD/JPY eased about 0.3% to 152.94 as the Japanese yen recouped some ground following a prior session of steep losses. The modest recovery followed a weak Japanese GDP print for the fourth quarter that was substantially below expectations, raising concerns about slowing growth. That reading increased market talk of potential additional stimulus from Tokyo, and the yen also found some support from reports suggesting the Bank of Japan could be likely to raise interest rates as soon as April.
USD/CNY held largely unchanged at 6.9087, remaining close to near three-year lows while Chinese markets are closed for the remainder of the week.
AUD/USD slipped slightly to 0.7068 after minutes from the Reserve Bank of Australia’s February meeting indicated policymakers were not committed to further rate hikes despite a 25 basis point increase. The minutes flagged continued concern over sticky Australian inflation, warning that additional rises in prices would likely prompt further tightening.
What to watch
- Federal Reserve minutes from January - potential insight into policymakers’ views on inflation and labor market risks.
- ADP weekly payrolls and the Empire Manufacturing index - near-term indicators of labor market and manufacturing strength.
- U.S. PCE price index for December - the Fed’s preferred inflation gauge and a key input into rate expectations.
For now, currency markets are moving cautiously as investors parse mixed economic signals and await more definitive data later in the week.