Last Week’s Hawkish Fed Minutes Fails To Lift Dollar

The U.S. Dollar retreated against major currencies during the week ended February 23 despite the Fed minutes leaning hawkish and Fed speakers indicating unease with early rate cuts. The U.S. Dollar retreated against the euro, the British pound and the Australian Dollar but held firm against the Japanese Yen. The 6-currency Dollar Index also declined during the week.

The week ended February 23 was marked by the publication of the monetary policy committee minutes from the U.S. and Australia, as well as release of flash PMI readings from multiple countries, trade data from Japan, and business climate and growth indicators from Germany. During the week, the People’s Bank of China cut its 5-year loan prime rate by 25 basis points, far more than by 15 basis points that the markets were expecting. Comments by several central bank officials including Governor Andrew Bailey of Bank of England swayed currency market sentiment during the course of the week.

Minutes of the January meeting of the Federal Open Markets Committee released on Wednesday revealed a Fed not comfortable with cutting interest rates before a convincing dip in inflation. The deliberations revealed that members did not consider it appropriate to reduce the target range until they had gained greater confidence that inflation was moving sustainably towards the goal of 2 percent.

Though anxiety ahead of the release of the FOMC minutes had lifted the index to a weekly-high of 104.41 on Tuesday, the sentiment was short-lived, and the index dropped to the week’s low of 103.43 on Thursday. The Dollar Index, a measure of the Dollar’s strength against a basket of six currencies comprising the euro, the Japanese Yen, the British pound, the Canadian Dollar, the Swedish Kroner and the Swiss Franc eventually closed at 103.94 on February 23, versus 104.30 a week earlier, shedding almost 0.35 percent.

A dimming in the Dollar’s dazzle also coincided with the NVIDIA-led tech rally, the decline in treasury yields as well as a dip in the number of people in the U.S. claiming unemployment benefits.

Amidst the greenback’s weakness, the euro gained a little more than 0.40 percent against the U.S. Dollar during the week ended February 23. The EUR/USD pair which had closed at 1.0774 on February 16 rose to 1.0818 by the following week. The pair traded between a low of 1.0761 recorded on Tuesday and the high of 1.0889 recorded on Wednesday. Germany’s Manufacturing PMI unexpectedly dropped to 42.3 in February, from 45.5 in January and forecasts of 46.1, as well as the contraction in the German GDP in the final quarter of 2023 had nevertheless weighed on sentiment for the Euro.

The British Pound’s rally against the U.S. Dollar was much more pronounced, with the GBP/USD pair adding 0.64 percent during the week ended February 23. The pair which had fallen to the weekly-low of 1.2578 on Tuesday amidst comments by Bank of England Governor Andrew Bailey that he was comfortable with markets expecting rate cuts, however climbed to the weekly-high of 1.2711 by Thursday. Flash PMI readings for February on Thursday revealed a minor uptick in manufacturing sector and flat readings for the services sector. The pound sterling closed on February 23 at $1.2679, versus $1.2598 a week earlier.

The AUD/USD pair recorded an increase of 0.44 percent during the week ended February 23. The pair’s trading ranged between the low of 0.6521 on Tuesday and the high of 0.6597 on Thursday. Minutes of the latest monetary policy meeting released on Monday showed the Reserve Bank of Australia debated the possibility of a rate hike before agreeing to keep the rates on hold. From the closing level of 0.6531 on February 16, the pair increased to 0.6560 by February 23. Flash manufacturing PMI readings for February recorded a decline whereas for the services sector the readings portended an increase.

In the past week, the U.S. Dollar rallied 0.19 percent against the Japanese Yen, with the USD/JPY pair rising to 150.50, from 150.21 a week earlier. The pair traded between the low of 149.68 on Tuesday and the high of 150.79 on Friday. Data released during the week had shown Japan’s exports rising by 11.9 percent and imports falling 9.6 percent in January, narrowing the trade deficit sharply. Also, flash numbers for February showed a decrease in both Manufacturing as well as Services PMI readings, dampening the sentiment for the yen.

All eyes are now on the major data releases on the horizon. Annual inflation reading for January is due from Japan later in the day and the USD/JPY pair has increased to 150.73. The GFK Consumer Confidence reading from Germany is due on Tuesday.

Durable Goods orders and the second estimate of fourth Quarter GDP readings are due from the U.S. in the coming days. Inflation readings from the Euro Area are also anticipated in the week. Nevertheless, the spotlight is on the Fed-preferred PCE-based inflation readings due from the U.S. on Thursday. Amidst the anxiety, the Dollar Index has decreased to 103.78. The EUR/USD pair has increased to 1.0850 whereas the GBP/USD pair is at 1.2687 The AUD/USD pair has in the meanwhile dropped to 0.6545.

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