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Dollar dips ahead of US inflation report

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Written by:
Myrsini Giannouli

14 February 2023
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Important calendar events

  • JPY: Annual Preliminary GDP Price Index, Quarterly Preliminary GDP, Revised Industrial Production
  • GBP: Claimant Count Change, Average Earnings Index, Unemployment Rate, CB Leading Index
  • EUR: Flash Employment Change, Flash GDP, ECOFIN Meetings
  • USD: NFIB Small Business Index, Monthly CPI and Core CPI, Annual CPI


The dollar gained strength in early trading on Monday but dipped later in the day. The dollar index rose as high as 103.8, then dropped to 103.3. US Treasury yields also gained strength early in the day, with the US 10-year bond yielding over 3.75%, but then retreating to 3.72%. 

After a series of aggressive rate hikes last year, the Fed has finally decided to relax its hawkish policy. The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. 

Many analysts believe that the Fed will continue raising interest rates at a slower pace until the benchmark interest rate reaches at least 5.0%. This means there are likely still a couple of rate hikes up ahead, which may support the dollar. Rate hikes have become less aggressive, but the Fed might continue raising interest rates for longer than previously expected.

Fedspeak over the past week has been hawkish, emphasizing that further rate rises should be expected and that interest rates will need to remain high for a long period. Fed's Bowman stated on Monday that the UC central bank aims to continue raising interest rates to bring inflation down below 2%. 

Fed Chair Jerome Powell has stated that the disinflation process has begun but warned that it still has a long way to go. The Fed’s stance appears to be cautiously optimistic, reinforcing the notion that the Fed’s decisions will be based strongly on disinflation rates and the state of the US economy. 

Advanced quarterly GDP data revealed that the US economy is expanding at a higher rate than anticipated. US GDP for Q4 of 2022 grew by 2.9% against expectations of a 2.6% growth. The US is likely headed for an economic ‘soft landing’ and recession concerns ease. 

US inflation seems to be cooling, as US headline inflation also dropped to 6.5% year-on-year in December from 7.1% in November. Cooling price pressures have given the US Federal Reserve some leeway towards scaling back its interest rate increases, putting pressure on the dollar. 

This week, US inflation data are expected to have a significant impact on dollar prices. This week's most highly anticipated fundamentals are consumer inflation data (CPI) on Tuesday. Tuesday’s CPI data are expected to show that price pressures in the US are easing. Signs that the disinflation process is well underway may see the dollar tumbling. The rate at which inflation cools is expected to affect the dollar, as it might influence the Fed’s future policy.



The Euro benefitted from the dollar’s decline on Monday, as well as from improving Eurozone economic outlook and EUR/USD climbed above the 1.073 level. If the currency pair goes up, it may encounter resistance near 1.103. If the EUR/USD pair declines, it may find support at 1.065. 

The ECB raised interest rates by another 50 bp at its February meeting, bringing its main refinancing rate to 3.0%. ECB President Christine Lagarde has emphasized that the central bank aims to bring inflation down to its 2% target. Lagarde confirmed that another 50-bp rate hike would follow at the next monetary policy meeting in March, after which the ECB would re-evaluate its policy. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June. 

On Monday, the European Commission released EU Economic Forecasts for the next two years. The EU economic outlook appears to be improving, with an upgraded growth forecast for 2023 and downgraded inflation expectations. The EC’s report was more optimistic than expected, concluding that the EU area would narrowly avoid entering a recession. The EC lifted their growth outlook for 2023 to 0.9%, indicating that economic recovery in the EU is starting and the economy is slowly expanding. Inflation expectations were also downgraded, with headline inflation now expected to fall to 5.6% in 2023.

ECB rhetoric following the release of the report was also optimistic, with members Centeno and de Guindos highlighting the importance of declining EU inflation. ECB members also emphasized that rate hikes beyond March will be data-dependent. The conclusions of the EC report were ambiguous for the Euro. On one hand, improving economic conditions support the Euro, but on the other, cooling price pressures may induce the ECB to pause rate hikes after March.

EU inflation rates are decreasing, but they are still far from the ECB’s 2% goal. Final EU headline inflation dropped to 8.5% year-on-year in January from a 9.2% print in December, indicating that Eurozone inflation is cooling. The continued drop in inflation signals that the ECB’s efforts to tame inflation are bearing fruit. Price pressures in the Eurozone remain high though, and interest rates need to rise to combat inflation.

Eurozone Flash Employment Change and Flash GDP are due on Tuesday and may cause some volatility in Euro price. ECOFIN Meetings will also take place on Tuesday and may affect the Euro.

EURUSD 1hr chart



The Sterling gained strength on Monday and GBP/USD was propelled above 1.215 as the dollar declined. If the GBP/USD rate goes up, it may encounter resistance at 1.244, while support may be found near 1.196. 

The BOE raised interest rates by another 50 bp at its February meeting, bringing the official bank rate to 4.0%. The BOE Monetary Policy Report issued after the meeting was more dovish than expected, pointing to a possible pause in rate hikes. 

Last week, BOE Monetary Policy Report Hearings indicated that BOE officials are divided over the central bank’s future monetary policy. The dichotomy between MPC members does not bode well for the British economic outlook, as there is a high risk that inflation will become entrenched. 

GDP data released last week showed that the British economy is slowing down, putting pressure on the Sterling. The monthly GDP for December showed a 0.5% contraction in the British economy, which was more pessimistic than the 0.3% expected. Preliminary GDP for the final quarter of 2022 showed stagnation, while GDP for 2022 came in at 4.1%. The IMF 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.

Inflation data have shown that inflation in the UK is cooling. UK headline inflation dropped to 10.5% in December from 10.7% in November. With inflation remaining firmly above 10% though, additional measures would be required to bring price pressures down.

Several economic activity indicators are due on Tuesday for the UK, including, Claimant Count Change, Average Earnings Index, Unemployment Rate, and CB Leading Index. These may affect Sterling's price, although the GBP/USD rate on Tuesday, will likely be driven primarily by US CPI data.

GBPUSD 1hr chart



The Yen retreated against the dollar on Monday on speculation about the BOJ’s next Governor, and USD/JPY climbed above 132.8. If the USD/JPY pair declines, it may find support near 129.8. If the pair climbs, it may find resistance at 132.9. 

Incumbent BOJ Governor Haruhiko Kuroda’s term in office expires in April and rumors abound regarding his successor. BOJ Governor Kuroda is a staunch supporter of an ultra-loose monetary policy. Kuroda’s successor may decide to unwind the BOJ’s ultra-easy policy and a pivot in Japan’s monetary policy within 2023, which would boost the Yen considerably.

High volatility in Yen price is expected this week, as Japanese Prime Minister Fumio Kishida is due to submit nominees for BOJ Governor to parliament on Tuesday. 

Most sources report that former BOJ member Kazuo Ueda is set to be offered the position of BOJ governor. Ueda is an academic and is also a firm supporter of the central bank’s ultra-loose monetary policy, warning repeatedly against prematurely unwinding Japan’s ultra-loose stance. A change in leadership with Ueda at the helm would probably make little difference to BOJ policy. Market reaction reflected this eventuality, and the Yen tumbled after the rumors surfaced.

Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10%. 

BOJ Core CPI rose to 3.1% year-on-year, exceeding expectations of a 2.9% print. Japan's inflation has exceeded the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. National Core CPI for December was at 4.0%, rising above November’s 3.7% print. In addition, wages in Japan increased for the first time in nine months by 4.8% year-on-year in December. Increased price pressures and wages raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy.

The final GDP Price Index for the third quarter of 2022 showed economic contraction by 0.3% annually, and the Japanese economy shrank by 0.2% in the third quarter of 2022, mainly due to the high imported energy costs. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.

Preliminary GDP data for the final quarter of 2022 on Tuesday will provide information on Japan’s economic outlook and may influence the Yen. 

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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