The Dollar Index (DXY) is trading neutrally near the 103.80 level at the beginning of Wednesday’s sessions.
Following the Federal Reserve’s cautious stance on near-term interest rate cuts, the likelihood of rate reductions in March has decreased, while the probabilities for May have dropped to around 20%. Weak data yesterday pushed the US dollar lower.
If the US economy continues to exhibit weakness, markets may adjust their expectations. However, the current scenario suggests that the Federal Reserve is likely to begin cutting interest rates in June, which appears to support the strength of the dollar.
Markets are eagerly awaiting Personal Consumption Expenditure (PCE) and Gross Domestic Product (GDP) data from January and the fourth quarter, respectively, which could lead to changes in current expectations.
In my view, the US dollar may recover from its previous losses after yesterday’s durable goods figures. Additionally, some easing on the geopolitical front with German Chancellor Olaf Scholz and NATO Secretary-General Jens Stoltenberg rejecting French President Emmanuel Macron’s claims, stating that there will be no deployment of forces on the ground in Ukraine, despite Macron’s earlier tough talk about not engaging in combat.
All eyes are currently on the inflation figures scheduled for later this week. The markets have already priced in Federal Reserve Bank President Jeffrey Schmeidt’s speech in Kansas City, where he suggested that the Fed should exercise patience and not adjust its policy preemptively. No signals were given regarding the timing of interest rate cuts this year, leaving the markets uncertain.
Expectations for the Federal Reserve to pause at the March 20 meeting remain around 97.5%, while the chances of a rate cut are 2.5%. The yield on 10-year US Treasury bonds is trading at around 4.29%, higher for the day.
I believe a modest recovery in the yield on 10-year US Treasury bonds supports the dollar staying in the positive price zone. Trading volumes may be lower today with weak liquidity as traders await the release of the US Personal Consumption Expenditure index, the Federal Reserve’s preferred inflation gauge, on Thursday, providing more information about the Fed’s monetary policy in the coming months.
Especially after recent strong expectations for early interest rate cuts have faded, with statements from Federal Reserve officials indicating a cautious approach and perhaps delaying the start of policy easing for some time.
Given that recent inflation spikes may not be just temporary, the Fed has hinted at interest rate cuts this year, but the start may be delayed, and the size of cuts in 2024 is expected to be less. Therefore, Thursday’s data is likely to give a new signal for the dollar.
