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Dollar declines ahead of Fed policy meeting

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Written by:
Myrsini Giannouli

03 May 2023
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Important calendar events

  • EUR: French Gov Budget Balance, Spanish Unemployment Change, Italian Monthly Unemployment Rate, Eurozone Unemployment Rate
  • GBP: BOE Quarterly Bulletin
  • USD: ADP Non-Farm Employment Change, Final Services PMI, ISM Services PMI, Federal Funds Rate, FOMC Statement, FOMC Press Conference


The dollar edged lower on Tuesday ahead of Wednesday’s Fed policy meeting, with the dollar index dropping to the 101.9 level. US Treasury yields declined, with the US 10-year bond yielding approximately 3.43%. 

Disappointing jobs data on Tuesday pushed the dollar down. JOLTS job openings tumbled to 9.59 million in March from 9.97 million in February, against expectations of 9.64 million. The drop in job openings is an indication that the labor market is softening after prolonged economic tightening. 

Advance GDP data last week for the first quarter of the year were mostly disappointing, pushing the dollar down. GDP data showed that the US economy expanded by 1.1% against expectations of 2% and a 2.6% growth in Q4 of 2022. Advance GDP Price Index on the other hand rose by 4.0% in Q1 of 2023, versus 3.7% expected. This index is a measure of inflation and indicates that price pressures remain high. US Unemployment Claims on Thursday were more optimistic than anticipated at 230K, dropping below expectations of 247K.

Key inflation data released last week showed that US inflation rose slightly in March. The core PCE Price Index, which is the Fed’s preferred inflation gauge, rose by 0.3% in March, in line with expectations. On an annual basis, core PCE increased by 4.6%, beating expectations for a 4.5% growth. 

US Consumer Price Index went down to 5.0% year-on-year in March from 6.0% in February. Monthly CPI rose by just 0.1% in March, indicating that inflation cooled significantly from February’s 0.4% print. Core CPI, which excludes food and energy, was in line with expectations, rising by 0.4% every month. PPI data last week fell below expectations, strengthening the notion that inflationary pressures are easing. PPI in March dropped by 0.5%, against expectations of remaining the same as in February. 

The Federal Reserve raised interest rates by only 25 basis points at its meeting in March, bringing the benchmark interest rate to a target range of 4.75% to 5.00%. 

There is no Fed commentary this week, as the Fed is in a blackout period, ahead of the next policy meeting on Wednesday. This week, the market will focus primarily on the Fed’s monetary policy decision. Policymakers are expected to raise interest rates by 25 basis points at Wednesday’s meeting, but the rate hike has already been priced in. Traders will focus mostly on the FOMC statement and press conference for forward guidance. Hints for a halt in rate hikes and a pivot to a more dovish policy are expected to weaken the dollar further.

Markets are anticipating a pause in rate hikes after this last interest raise and there is a high probability of rate cuts starting in November, depending on economic conditions and inflationary pressures. The US Central Bank has signaled that its hawkish policy is coming to an end, as inflationary pressures are receding. In addition, prolonged tightening is putting the economy at risk and the recent turmoil in the banking sector has increased recession concerns. 

Several strong economic indicators are due on Wednesday, especially ADP Non-Farm Employment Change and Final Services PMI data. The dollar is expected to be especially sensitive to the release of economic data on Wednesday, ahead of the Fed monetary policy meeting later in the day.



The Euro was volatile on Tuesday ahead of the all-important Fed and ECB policy meetings later in the week. EUR/USD plummeted in early trading but pared losses later in the day, reclaiming the 1.100 level. If the currency pair goes up, it may encounter resistance near 1.109. If the EUR/USD pair declines, it may find support at 1.091. 

The EUR/USD pair is expected to exhibit high volatility, as the Fed and ECB monetary policy meetings are coming up this week. The Fed rate decision is due on the 3rd and the ECB policy meeting is just one day later, on the 4th

Inflation data on Tuesday showed that price pressures in the Eurozone remain high. Headline inflation rose to 7.0% year-on-year in April from 6.9% in March, in line with expectations. Core CPI, which excludes food and energy, dropped slightly to 5.6% on an annual basis in April from 5.7% in March. Eurozone inflation is not showing signs of cooling despite the ECB’s aggressive tightening. 

The ECB raised interest rates by 50 bp at its monetary policy meeting in March, bringing its main refinancing rate to 3.5%. Market odds are in favor of a 25-bp ECB rate hike this week and the interest rate increase has already been priced in. Inflationary pressures in the EU remain high and the ECB is not expected to signal a pause in rate hikes just yet. 

The ECB, however, is expected to reassess its policy direction ahead of its next meeting in June. EU policymakers must take a lot of variables into account, including the effect of economic tightening on the now fragile banking sector. ECB Vice President Luis de Guindos has warned that the ECB is unlikely to provide forward guidance on its next policy moves given the uncertainty in the outlook. 

Preliminary GDP Flash data released last week for the Eurozone were disappointing, putting pressure on the Euro. Flash GDP for the first quarter of the year rose to 0.1%, registering a small improvement against the 0 print for the final quarter of 2022. The print was lower than the consensus estimate of 0.2% growth, indicating very slow economic expansion in the EU. 

Several economic activity indicators are due on Wednesday for some of the leading economies in the EU and for the Eurozone as a whole. These include French Gov Budget Balance, Spanish Unemployment Change, Italian Monthly Unemployment Rate, and Eurozone Unemployment Rate and may affect the Euro ahead of the ECB monetary policy meeting later in the week. 

EURUSD 1hr chart



The Sterling lost strength against the dollar on Tuesday and the GBP/USD pair dropped below 1.247. If the GBP/USD rate goes up, it may encounter resistance near 1.258, while support may be found near 1.236. 

British headline inflation remained above the 10% level in March, dropping to 10.1% year-on-year from 10.5% in February. Even though inflation showed signs of cooling, it exceeded expectations of a 9.8% print. Price pressures remain high in the UK, forcing the BOE to continue its policy of economic tightening at the risk of economic recession.  

The BOE raised interest rates by 25 bp at its meeting in March, bringing the official bank rate to 4.25%. BOE is expected to continue hiking rates by 25-bp at its next policy meeting in May. Market odds are in favor of more BOE rate hikes up ahead. The BOE is not likely to pause rate hikes yet and many analysts predict no rate cuts at all within the year if inflation remains high.

The UK economy registered stagnation in March according to recent GDP data. Monthly GDP dropped to zero, falling below expectations of 0.1% expansion. In addition, the IMF has downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts.

The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.

The BOE Quarterly Bulletin is scheduled to be released on Wednesday and may affect Sterling's price, as it may provide hints on the BOE policy direction ahead of the monetary policy decision next week. 

GBPUSD 1hr chart



The Yen gained strength against the dollar on Tuesday and USD/JPY plummeted to the 136.5 level. If the USD/JPY pair declines, it may find support near 133. If the pair climbs, it may find resistance at 138.1. 

Monetary Base data released Tuesday for Japan were pessimistic for the country’s economy, adding more pressure on the Yen. Monetary Base reflects the change in the total quantity of domestic currency in circulation and current account deposits held at the BOJ. The monetary base in April dropped by 1.7%, against a 1.0% drop in March and expectation of a 1.3% decline. 

The Yen lost strength last week after the BOJ decided to continue its dovish monetary policy. Last week’s monetary policy meeting was the first one with the newly-appointed BOJ Governor Kazuo Ueda at the helm. Kazuo Ueda has replaced Haruhiko Kuroda, whose term in office ended on April 9th, becoming the BOJ's 32nd governor. 

Japanese policymakers maintained ultra-low interest rates at the BOJ policy meeting on Friday, keeping the central bank’s refinancing rate at -0.10%. The BOJ interest rate decision was largely expected by markets and had already been priced in. The BOJ issued a statement that was more dovish than anticipated, however, putting pressure on the Yen. 

The BOJ modified its forward guidance slightly at last week’s meeting, by removing a pledge to keep interest rates at current or lower levels. In addition, the BOJ announced a review of the impact of its easing policies with a planned time frame of around one to one-and-a-half years. This signals a policy change down the road, although it is clear that the BOJ does not have any immediate plans to pivot to a more hawkish policy. On the other hand, the BOJ sent mixed messages to markets, by announcing that its Yield Curve Control Policy will remain unchanged. Many market participants were expecting a more hawkish forward guidance and the Yen plummeted. 

BOJ Core CPI rose to 2.9% in March on an annual basis from 2.7% in February. March’s print exceeded expectations of a 2.6% growth, indicating that price pressures in Japan continue to rise.

National Core CPI remained unchanged at 3.1% year-on-year in March. Tokyo Core CPI for April was hotter than expected, at 3.5% on an annual basis, against expectations of a 3.2% print. Inflation in Japan remains steadily above the BOJ’s 2% target, putting pressure on businesses and households. Increased price pressures and wages, raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy. 

Final GDP data for Q4 of 2022 have shown that the Japanese economy has reached stagnation. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy. The final GDP Price Index printed slightly higher than expected, with a 1.2% annual expansion, versus the 1.1% predicted.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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