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Dollar weakens ahead of US GDP

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Written by:
Myrsini Giannouli

26 January 2023
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Important calendar events

  • JPY: BOJ Summary of Opinions, Annual SPPI
  • EUR: German Import Prices, Spanish Unemployment Rate
  • USD: Quarterly Advance GDP and GDP Price Index, Core Durable Goods and Durable Goods Orders, Unemployment Claims, Goods Trade Balance, New Home Sales


The dollar traded with low volatility on Wednesday, edging lower as markets await the release of US GDP data on Wednesday. The dollar index remained below the 102 level most of the day, without a clear direction in the absence of US economic data. US Treasury yields also dipped on Wednesday, with the US 10-year bond yielding approximately 3.45%. 

US inflation seems to be cooling, as Producer Price Index declined by 0.5% in December, versus estimates of a 0.1% drop. In addition, November’s PPI print was revised to reflect a 0.2% increase, instead of the original 0.3% to 0.2%.

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

Fed interest rate increases have been the main factor driving the US dollar and treasury yields over the past few months. At the latest monetary policy meeting the Fed raised interest rates by 50 basis points, bringing the benchmark interest rate to a target range of 4.25% to 4.50%. 

US economic outlook and inflation will likely determine the pace of future rate hikes. Many analysts believe that the Fed will ease its rate hikes but will continue raising interest rates at a slower pace until the benchmark interest rate reaches at least 5.0%. This means that there are likely still a couple of rate hikes up ahead, which may provide support for the dollar. Markets however are currently pricing in a more moderate 25-bp rate hike at the Fed’s next monetary policy meeting.

As interest in the Fed’s future policy direction mounts, the dollar will be especially sensitive to FOMC members’ speeches this week. Quarterly Advance GDP and GDP Price Index scheduled to be released on Thursday may also affect the dollar, as they are strong indicators of the economic outlook. Other economic activity indicators due on Thursday for the US include Core Durable Goods and Durable Goods Orders, Unemployment Claims, Goods Trade Balance, and New Home Sales.



The Euro rose against the dollar on Wednesday and EUR/USD climbed to fresh nine-month highs, rising above the 1.089 level resistance. If the currency pair goes up, it may encounter resistance at 1.089 and higher up near 1.118. If the EUR/USD pair declines, it may find support at 1.048. 

German IFO Business Climate data on Wednesday suggest that the country's economic outlook is improving. The German data revealed that the Business Climate indicator rose to 90.2 in January from 88.6 in December, indicating that business sentiment is more optimistic. Belgian NBB Business Climate on the other hand remained at -13.5 in January, which is only a marginal improvement over December’s -13.6 print.

ECB President Christine Lagarde delivered a particularly hawkish speech on Monday, emphasizing the central bank’s commitment to raising interest rates. Lagarde stated that the ECB will still have to raise interest rates significantly at a steady pace to combat soaring inflation. 

Final EU headline inflation dropped 9.2% year-on-year in December from a 10.1% print in November indicating that Eurozone inflation is cooling. This is the first drastic drop in inflation that 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 significantly to combat entrenched inflation. 

EU inflation rates are still far from the ECB’s 2% goal and are forcing the central bank to hike rates aggressively. In its latest monetary policy meeting in December, the ECB raised interest rates by 50 bp, bringing its benchmark interest rate to 2.50%. The question, however, is whether economic conditions in the Eurozone will allow the ECB to continue raising interest rates at a fast pace. EU economic outlook is poor, and the ECB might be forced to raise interest rates in a recessionary backdrop.

Markets are pricing in at least two more 50-bp rate hikes in February and March this year. On the other hand, market odds for the next Fed rate hike are at 25-bp, as a pivot in the Fed’s policy is expected. If this scenario comes true, it will boost the Euro against the dollar. 

Minor economic activity indicators are due on Thursday for the Eurozone, including German Import Prices and Spanish Unemployment Rate. Market participants will also pay close attention to ECB members’ speeches to gauge the central bank’s monetary policy direction.

EURUSD 1hr chart



The Sterling gained strength on Wednesday after the release of UK inflation data. Markets initially reacted to news of cooling UK inflation with a drop in the Sterling, but the currency was propelled upwards later in the day and GBP/USD touched 1.240. If the GBP/USD rate goes up, it may encounter resistance at 1.244, while support may be found near 1.184. 

BOE Governor Andrew Bailey last week appeared to be optimistic about British inflation this year, stating that that inflation looks set to fall markedly as energy prices decrease. He stressed, however, that labor shortages in the UK pose a threat to cooling inflation rates. Bailey also stated that a corner has been turned in UK inflation, appearing confident that inflation rates will continue to decline.

PPI Input data, which is an indicator of consumer inflation, were released on Wednesday for two months, November and December. PPI Input dropped by 0.2% in November from an increase of 0.9% in October, and in December, consumer inflation cooled even further, decreasing by 1.1%. Similarly, PPI output data released for November and December showed that British manufacturers unexpectedly lowered their prices over the past two months. PPI Output printed at -0.1% in November from 0.9% in October and at -1.1% in December, suggesting that inflation may be easing.

UK headline inflation dropped to 10.5% in December from 10.7% in November, in line with expectations. Core CPI, which excludes food and energy, remained at 6.3%, against expectations of a 6.2% print. The Sterling went up after the release of the CPI data as UK inflation has become entrenched, remaining firmly above 10%.

Surging inflation has forced the BOE to adopt a more hawkish fiscal policy, bringing its interest rate to 3.50% in December, its highest rate in 14 years. In the latest monetary policy meeting in December, BOE members voted to hike rates by 50 bps. With inflation remaining above 10%, this was perceived by many analysts as the start of a pivot toward a more dovish fiscal policy, putting pressure on the Sterling. 

The UK’s grim economic outlook may limit policymakers’ ability to increase interest rates sufficiently to rein in inflation. The final GDP print for the third quarter of 2022 was -0.3%, indicating that the economy in the UK is shrinking. The British economy is still struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down. 

GBPUSD 1hr chart



The Yen edged higher on Wednesday, as the dollar weakened. USD/JPY dropped slightly, touching the 129.3 level. If the USD/JPY pair declines, it may find support near 127.2 and further down at 114.2. If the pair climbs, it may find resistance at 138.2.

BOJ Core CPI rose to 3.1% year-on-year, exceeding expectations of a 2.9% print. Inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. National Core CPI released last week for December was at 4.0%, rising above November’s 3.7% print. 

Monetary Policy Meeting Minutes of the BOJ’s previous meeting in December released on Monday showed that Government Officials sought a half-hour adjournment during the meeting to contact their ministries before reaching a crucial decision on the central bank’s yield curve control policy. The BOJ caused a stir in markets in its previous meeting in December by changing its yield control target for the 10-year government bond to between plus or minus 0.50%, from a previous 0.25%. The BOJ had set a target range around zero for government bond yields for years, and this adjustment may be the signal of a shift towards a more hawkish policy. Long-term, this move may allow interest rates to rise, cutting off some of its monetary stimuli.

Japanese policymakers maintained ultra-low interest rates last week, keeping the central bank’s refinancing rate at -0.10% as expected. The BOJ was expected to relax its yield curve control policy further, but the central bank left all policy settings unchanged this month putting pressure on the Yen.

BOJ Governor Haruhiko Kuroda defended the central bank's decision to keep its yield curve control policy unchanged and vowed to conduct unlimited bond buying to maintain the bank’s yield curve control. Kuroda, however, is due to retire in April and his successor may decide to unwind the BOJ’s ultra-easy policy. A pivot in Japan’s monetary policy within 2023, would boost the Yen considerably. 

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

BOJ Summary of Opinions scheduled to be released on Thursday may give some insight into the BOJ’s outlook and may cause some volatility in Yen price.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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