Dollar index on track for weekly loss before U.S. jobs data

DXY index dips ahead of U.S. nonfarm payrolls report on Friday

The U.S. dollar declined against a range of currencies on Friday, as upbeat Big Teach earnings on Wall Street enhanced investors' preference for riskier assets, while traders waited on U.S. jobs data to assess potential timelines for the Federal Reserve to start loosening its monetary policy.

Following the Federal Reserve's recent decision to keep U.S. interest rates unchanged, all eyes are on the upcoming nonfarm payrolls report on Friday. The Fed meeting saw Chair Jerome Powell dismiss market expectations of interest rate cuts in March, saying that they weren’t the central bank’s “base case”.

The Australian dollar saw a modest increase of 0.33%, trading at $0.6594, despite a significant deceleration in domestic inflation limiting its weekly gain to roughly 0.3%. Meanwhile, the New Zealand dollar rose by 0.11% to $0.6151, marking its strongest weekly performance in more than a month with a 1% gain.

The U.S. dollar index (DXY), a gauge of the greenback’s performance against six major currencies, dipped by 0.09% to 102.95, continuing its downward trend from the previous day and heading towards its first weekly drop this year. The DXY has so far gained 1.6% year-to-date, although its 12-month performance has seen it hover around the same level.

In a comment to Reuters on Friday’s U.S. jobs report, Ray Attrill, head of FX strategy at National Australia Bank, said:

"If we have a relatively soft payrolls number... then I think you'd probably see the needle move a little bit further back, closer to 50-50 [for March rate cut expectations]. I think the dollar will be quite sensitive to that."

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Expectations of March interest rate cut dive as Powell pushes back, cut by May fully priced in

Current market expectations reflect a reduced likelihood of a Fed rate cut in March, now at 37.5% — a marked drop from over 70% a month ago. However, markets are fully pricing in an interest rate cut by May.

Raf Choudhury, investment director of multi-asset at the investment firm abrdn, explained the company’s interest rate forecast to Reuters:

"We continue to expect three rate cuts to take place in 2024, with the first cut taking place mid-2024, (followed) by subsequent cuts each quarter. We do think the market pricing in five or more cuts as soon as March seems ambitious and have more confidence in the dot plots which signal three cuts this year."

This shift towards lower expected U.S. interest rates has led to a decline in Treasury yields, with the 2-year yield, which typically reflects short-term rate forecasts, at 4.2124%, and the 10-year Treasury yield falling to 3.8779% after a near 30 basis points drop over the week.

Concerns about regional U.S. banks this week also prompted a move towards the relative safety of U.S. Treasuries.

USD/JPY steady, sterling and EUR/USD rise

In other currency news, the Japanese yen remained steady against the dollar, with the USD to JPY rate at 146.36 and the pair aiming for a weekly increase of over 1% — its largest rise in a month. Discussions at the Bank of Japan's January meeting hinted at a potential departure from negative interest rates soon, signaling the possibility of Japan's first interest rate hike since 2007.

The British pound rose by 0.17% to $1.2765 following the Bank of England's decision to keep UK interest rates elevated, with hints at potential future cuts as inflation decreases.

In a comment Thierry Wizman, Macquarie's global FX and rates strategist said:

"The (Monetary Policy Committee) — following the Fed— kept the Bank Rate target at 5.25% and dropped the 'tightening' bias in favour of a neutral bias. But, also like the Fed's tone... there was a decidedly cautious aspect to the MPC's communications to counter the switch in the policy bias”.

The EUR to USD pair saw a modest increase of 0.12% to $1.0880, eyeing a weekly rise of nearly 0.3%. Recent data indicated a decrease in eurozone inflation, with underlying price pressures dropping less than expected, supporting the European Central Bank's argument that interest rate cuts should not be rushed.

At the time of writing on Friday, DXY — the U.S. dollar index — was down 0.06% on the day at 102.99 and was poised to end the week down over 0.4%.

When considering foreign currency (forex) and indices for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.