The US dollar retreated this week, poised for its first weekly loss in seven, as cooling inflation fueled speculation of a less aggressive Federal Reserve. Conversely, the British pound weakened following disappointing retail sales figures.
Table Content:
Dollar’s Six-Week Winning Streak Snapped by Inflation Data
The dollar index, which measures the greenback against a basket of major currencies, edged up slightly but remained on track for a weekly decline of around 0.5%. This shift comes after softer-than-anticipated inflation data suggested the possibility of a more dovish monetary policy from the Federal Reserve in 2025. While Fed officials have maintained a cautious stance on future rate cuts, recent comments from Fed Governor Christopher Waller indicated that three or four rate cuts remain possible if economic data continues to weaken. Market analysts at ING noted that while the monthly slowdown in core inflation offered a glimmer of hope, market sentiment remained cautiously optimistic.
Weak UK Retail Sales Drag Down Sterling
The British pound fell against the dollar after December retail sales unexpectedly contracted by 0.3% month-on-month, following a downwardly revised 0.1% expansion in November. This disappointing data increases the likelihood of an economic contraction in the fourth quarter, reinforcing concerns about the UK’s economic outlook. Earlier data revealed stagnant growth in November, further contributing to the gloomy picture. Current market expectations anticipate the Bank of England will implement two interest rate cuts in 2025, with the first potentially as early as February.
Euro and Yen Movements
The euro remained relatively stable against the dollar, hovering around 1.0300, ahead of the final eurozone consumer price index release for December. Analysts suggest the current EUR/USD exchange rate reflects a 2.5-3% risk premium, implying a potential undervaluation of the euro. This situation is expected to persist until greater clarity emerges regarding potential protectionist policies. Meanwhile, the Japanese yen strengthened against the dollar, nearing a one-month high. This surge followed hints from Bank of Japan officials about a possible interest rate hike at their upcoming meeting.
Chinese Yuan Strengthens on Robust GDP Growth
The Chinese yuan appreciated against the dollar after reaching a one-year high earlier in the week. China’s fourth-quarter GDP growth exceeded expectations, expanding by 5.4%, attributed to recent stimulus measures. This positive economic news bolstered the yuan’s performance.
Conclusion: Shifting Global Currency Dynamics
The week’s currency movements highlight the significant impact of economic data on investor sentiment and currency valuations. Easing US inflation has weakened the dollar, potentially signaling a shift in the Federal Reserve’s monetary policy trajectory. Conversely, weak economic data from the UK has pressured the pound, raising concerns about future economic performance. These developments underscore the dynamic nature of the global currency market and the importance of closely monitoring economic indicators for investment decisions.
