Fed’s Pause Hastens Dollar’s Slide

The Dollar dropped heavily against major currencies during the week ended June 16 amidst the Federal Reserve skipping a rate hike.

Expectations of a dip in inflation and a pause by the Fed set the tone for the Dollar’s trajectory in the week starting on Monday, June 12.

Data released on Tuesday showed annual consumer price inflation falling to 4 percent in the month of May, versus 4.9 percent in the previous month and expectations of 4.1 percent. Core inflation, excluding the volatile food and fuel components too dropped as expected to 5.3 percent from 5.5 percent earlier. Month-on-month inflation, which was seen dropping from 0.4 percent to 0.2 percent, cooled to 0.1 percent. Subsequent data also showed weak producer price inflation and retail sales readings. Exacerbating the Dollar’s slide.

Though the Fed did not hike rates in its mid-June meeting it hinted at more rate hikes for the year.

In the Summary of Economic Projections issued on Wednesday, the Fed pegged the inflation forecast for 2023 at 3.2 percent, versus the 3.3 percent projected in March and 3.1 percent projected in December. The Fed also forecasted inflation reducing to 2.5 percent by 2024 and 2.1 percent by 2025.

The forecast of growth or the change in real GDP in 2023 was increased to 1 percent from 0.4 percent projected in March and 0.5 percent projected in December. The unemployment rate has been forecast to fall to 4.1 percent, from 4.5 percent projected in March and 4.6 percent projected in December.

The median year-end projection for the federal funds rate has been retained at 5.1 percent. The same is projected to decrease to 4.3 percent by 2024, to 3.1 percent by 2025 and to 2.5 percent in the longer run.

In this backdrop, the Dollar Index or DXY, a measure of the Dollar’s relative strength against a basket of 6 currencies dropped 1.3 percent during the week, versus 0.43 percent during the week ended June 9 and 0.16 percent during the week ended June 2. From the level of 103.56 on June 9, the Dollar Index plunged to 102.24 by the end of trading on June 16. The index which had touched the weekly high of 103.76 on Monday steadily declined over the course of the week and touched a weekly low of 102.01 on Friday.

Meanwhile, as widely expected, the European Central Bank, on Thursday raised rates by another 25 basis points. It also hinted at more rate hikes to combat the high inflation. The euro appreciated 1.7 percent against the U.S. Dollar amidst the ECB’s eighth successive rate hike and hawkish guidance on future rate hikes. The EUR/USD pair closed at 1.0933 versus 1.0747 a week earlier. The euro climbed steadily against the dollar, from the low of $1.0733 on the first day of the week to $1.0971 by the last day of the week.

The pound strengthened close to 2 percent to the Dollar during the week ended June 16 amidst expectations that the Bank of England would deliver another 25-basis points rate hike in its review next week. From the level of 1.569 on June 9, the pair advanced to 1.2817 in the span of a week. Like the euro, the pound too climbed steadily against the Dollar over the course of the week, rising from a low of 1.2486 on Monday to a high of 1.2850 on Friday.

The AUD/USD pair added more than 2 percent during the week spanning June 12 to 16. The AUD/USD pair closed at 0.6877 versus 0.6739 a week earlier. The pair rose steadily during the week, from the week’s low of 0.6730 touched on Monday to the week’s high of 0.6901 touched on Friday.

Despite losses against major currencies, the Dollar held ground against the Japanese yen during the week ended June 16 amidst the Bank of Japan holding rates steady, keeping its yield curve control program untouched and maintaining its dovish stance. The BoJ’s stance pressured the yen and it depreciated around 1.8 percent against the U.S. Dollar. The USD/JPY pair surged to 141.82, from 139.34 a week earlier. The pair’s low point was 139.01 touched on Tuesday and the high point was 141.92 touched on Friday. Downgrades to China’s growth forecasts also impacted sentiment.

Market focus has now shifted to the Federal Reserve chair Jerome Powell’s congressional testimony on Wednesday that would provide guidance on future monetary policy.

The U.K.’s inflation readings due on Wednesday, as well as the interest rate decision by the Bank of England on Thursday are also expected to influence currency market sentiment. Inflation in the U.K. is seen falling to 8.4 percent in May, from 8.7 percent a month earlier. The Bank of England is widely expected to raise rates by 25 basis points. The GBP/USD pair is currently at 1.2742.

The probability assigned to a quarter percent rate hike by the Fed in the ensuing review, as implied by the 30-Day Fed Funds futures pricing data sourced from the CME FedWatch tool is at 71.9 percent. Only 28.1 percent probability is perceived for a pause by the Fed. The Dollar Index is currently at 102.59.

The EUR/USD pair has decreased to 1.0920 and so has the AUD/USD pair which is at 0.6744. The USD/JPY pair has fallen to 141.36.

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