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Dollar retreats even as rate hike expectations rise

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Written by:
Myrsini Giannouli

19 April 2023
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Important calendar events

  • JPY: Revised Industrial Production
  • GBP: Annual CPI and Core CPI, PPI Input and Output, RPI, HPI, BOE Quarterly Bulletin
  • EUR: Current Account, Annual Final CPI, and Core CPI


The dollar weakened on Tuesday, with the dollar index dropping to the 101.7 level. US Treasury also declined, with the US 10-year bond yielding approximately 3.57%. 

Positive manufacturing data lifted the dollar on Monday, but the currency resumed its descent on Tuesday. The Empire State Manufacturing Index rose to 10.8 in April, after registering four successive prints below zero. A value above zero indicates improving conditions and industry expansion.

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%. The minutes of the latest Fed meeting released last week showed that several FOMC members considered a pause in rate hikes in March. 

There is a lot of uncertainty and speculation on what the Fed is going to do at its next meeting in May. Market odds are currently in favor of another 25-basis point rate hike rather than a pause in rate hikes. Even though rate hike expectations rose this week, they have already been priced in by markets and the dollar resumed its descent on Tuesday.

US inflation data last week showed that price pressures are decelerating for the ninth consecutive month. 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. 

Final GDP data for the final quarter of 2022 were disappointing, showing that the US economy expanded by 2.6% against expectations of a 2.7% growth. 

FOMC members’ speeches this week will be closely followed by traders for hints into the Fed’s future policy direction and are likely to affect the dollar. 



The Euro benefitted from the dollar’s weakness on Tuesday, with EUR/USD climbing to the 1.097 level. If the currency pair goes up, it may encounter resistance near 1.107. If the EUR/USD pair declines, it may find support at 1.083. 

German economic sentiment deteriorated in April, according to data released on Tuesday. German ZEW economic sentiment dropped to 4.1, falling below expectations of 15.3 and last month’s print of 13.

Signs that the ECB will continue hiking interest rates aggressively boosted the Euro this week. ECB’s Joachim Nagel stated last week that the EU Central Bank needs to continue raising interest rates as inflation risks becoming entrenched. 

The ECB raised interest rates by 50 bp at its monetary policy meeting in March, bringing its main refinancing rate to 3.5%. The ECB stressed the importance of a data-driven approach to monetary policy moving forward. 

Headline inflation in the Eurozone eased to 6.9% year-on-year in March from 8.5 % in February, against expectations of a 7.1% print. Core CPI, which excludes food and energy, went up slightly to 5.7% annually in March from 5.6% in February, hitting a record high. 

Recent GDP painted a grim picture of the Eurozone economy. The GDP print for the final quarter of 2022 was zero, indicating that the EU economy is stagnating and recession looms.

Important economic indicators are due on Wednesday for the Eurozone and may cause volatility in Euro price. These include EU Annual Final CPI and Core CPI. Flash estimates of these indicators were released a few weeks ago and any deviation from these early estimates may affect the Euro.

EURUSD 1hr chart



The Sterling rose against the dollar on Tuesday, with the GBP/USD pair climbing to the 1.244 level. If the GBP/USD rate goes up, it may encounter resistance near 1.254, while support may be found near 1.235. 

UK jobs data on Tuesday boosted the Sterling. Britain’s unemployment rate rose by 3.8% in the three months to February, against expectations of a 3.7% rise. Pay growth for the three months to January was revised up to 5.9%, exceeding expectations of 5.1% growth. Increased earnings growth is an indicator of inflation. If inflationary pressures continue to rise, they may force the BOE to continue its hawkish policy.

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, although some analysts predict a pause in rate hikes.

UK headline inflation rose to 10.5% year-on-year in February from 10.1% in January, versus expectations of a drop to 9.9%. Price pressures remain high in the UK, forcing the BOE to continue its policy of economic tightening at the risk of economic recession.  

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.

Important indicators of inflation are due on Wednesday for the UK, including Annual CPI and Core CPI data. The BOE Quarterly Bulletin is also scheduled to be released on Wednesday and may contain hints on the Bank’s future policy. 

GBPUSD 1hr chart



USD/JPY traded sideways on Tuesday, oscillating around the 134.1 level. If the USD/JPY pair declines, it may find support near 132. If the pair climbs, it may find resistance at 134.7. 

The Bank of Japan maintained an ultra-easy policy at its monetary policy meeting in March, putting pressure on the Yen. Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10%. This was the last meeting for BOJ Governor Haruhiko Kuroda, whose term in office ended on April 9th, after remaining at the helm of the BOJ for a decade. 

Economist Kazuo Ueda has replaced Haruhiko Kuroda, becoming the BOJ's 32nd governor. Ueda will be faced with the challenge of normalizing Japan’s monetary policy after prolonged easing. Traders will be following Ueda’s speeches closely in the next few weeks, ahead of the BOJ policy meeting at the end of the month. Ueda has so far vowed to continue the BOJ’s ultra-easy policy, stating that he will carry out the monetary policy of his predecessor. 

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.

National Core CPI was at 3.1% year-on-year in February. Tokyo Core CPI for March was hotter than expected, at 3.2% on an annual basis, against expectations of a 3.1% print. Inflation in Japan has gone 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. 

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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