Dollar Index Rebounds Amidst Fed Jitters

Currency movements during the week spanning April 17-21 were to a great extent dominated by fears over how hawkish the Fed and other central banks would be in hiking interest rates to tame inflation. Inflation updates, minutes of monetary policy meeting, central bank commentary, as well as economic data releases swayed currency market sentiment.

The Dollar Index which had touched a one-year low of 100.79 on April 14 jumped to 102.23 on April 17. Strong corporate earnings, especially bank earnings raised expectations of strong rate hikes by the Federal Reserve. In tandem, the CME Fed watch tool showed the probability of a 25-basis points rate hike rise from 85 percent on April 17 to 89 percent by April 21. The rate hike expectations also erased hopes of a Fed pivot that had emerged with the banking crisis and strengthened with the sharp drop in producer price inflation.

However, higher-than-expected GDP data from China on Tuesday sparked risk-on sentiment, causing the safe-haven dollar and the DXY to retreat mildly to 101.75.

Nevertheless, amidst the chorus of central bank officials justifying rate hikes, the DXY gained 0.17 percent in the week, rising from 101.55 on April 14 to 101.72 on April 21. The week’s range was between 101.53 and 102.23.

Despite hawkish commentary from ECB officials that hinted at strong rate hikes, the euro edged lower against the U.S. Dollar, falling from 1.10 on April 14 to 1.0987 on April 21. The EUR/USD pair which had touched a one-year high of 1.1077 in the previous week dropped 0.12 percent during the week. Amidst expectations that the ECB would hike rates by 50 basis points at its meeting in May, the EUR/USD pair traded in the week between 1.10 and 1.0908.

The pound sterling however benefited from tightening expectations that emerged following the release of inflation data for March. Annual inflation in the U.K. in March stood at 10.1 percent, versus 10.4 percent in the previous month and expectations of a fall to 9.8 percent. The GBP/USD pair strengthened 0.14 percent during the week, rising from 1.2413 to 1.2430. The week’s trading range was between 1.2476 and 1.2352.

The AUD/USD pair strengthened to 0.6773 by Thursday as minutes of Reserve Bank of Australia’s monetary policy meeting released on Monday, revealed a readiness to hike rates. However, the fears of a Fed rate hike overwhelmed rate hike fears surrounding the Australian Dollar and the AUD/USD pair finished the week at 0.6690, dropping 0.27 percent from the level of 0.6708 at the end of the previous week. The pair’s low point for the week was 0.6677 touched on Friday.

Bank of Japan Governor Kazuo Ueda sticking on to an ultra-loose monetary policy path caused the Yen to weaken against the Dollar over the course of the week. From the level of 133.77 at the end of the previous week, the USD/JPY pair increased to as high as 135.13 by Wednesday. However, inflation data released towards the end of the week led to speculation that BoJ would eventually have to tighten its policy, dragging down the pair to as low as 133.55. The pair increased 0.28 percent during the week, to close at 134.15.

The coming weeks would see major central banks revisiting their interest rates. On the horizon are, annual inflation readings from Australia due on Tuesday, U.S. GDP readings and Bank of Japan’s interest rate decision due on Thursday, PCE-based inflation readings from the U.S. and Euro Zone GDP readings due on Friday etc. Interest rate decisions by the Reserve Bank of Australia, Federal Reserve and ECB are due the following week.

Amidst the uncertainty over economy and monetary policy, the DXY is currently at 101.59. The EUR/USD pair is at 1.1019 whereas the GBP/USD pair has increased to 1.2441. The AUD/USD pair is at 0.6676 whereas the USD/JPY pair has increased to 134.66.

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