Dollar slips as market eyes upcoming Fed action
The dollar edged lower against the euro and sterling on Friday, as the market readjusts ahead of the long weekend and awaits clues on how the Federal Reserve plans to continue tackling still-high inflation.
Several Federal Reserve officials signaled this week that the U.S. central bank likely has to raise interest rates higher to bring inflation back to its desired levels. That hawkish speak coupled with hotter-than-expected economic data has led some banks to forecast three additional rate hikes this year.
Goldman Sachs said it is expecting the Fed to hike rates three more times by a quarter of a percentage point each time, after data this week pointed to persistent inflation and resilience in the labor market.
"The market is kind of recalibrating itself for the coming months. The most realistic one, I think, is going to be the 25 basis points in March, and then another 25 basis points in May," said Amo Sahota, director at Klarity FX in San Francisco.
U.S. data on Thursday showed monthly producer prices increasing by the most in seven months in January as the cost of energy products surged, while the number of Americans filing new claims for unemployment benefits unexpectedly fell last week.
That came after data on Wednesday showed that U.S. retail sales increased by the most in nearly two years in January after two straight monthly declines.
"I think retail sales was a big one, and then the Fed speakers just helped kind of cement the idea from there," Sahota said. "Nobody really wanted to let go on the idea that we're going to have a Goldilocks return, and now it looks like someone ate all the porridge."
Fed funds futures traders are now pricing for the fed funds rate to reach 5.29% in July, and remain above 5% all year. The Fed's target range stands at 4.5% to 4.75%, having risen rapidly from 0% to 0.25% in March 2022.
The dollar index was up 0.03% at 103.88, after earlier reaching 104.67, the highest since Jan. 6.
"While the dollar is giving up some of its recent gains against Euro and Sterling today, the movements are relatively minor going into the holiday weekend. The market has already reacted to recent strong data prints in anticipating the Fed's playbook to put (the) dollar at its current level, but what happens next is still a question," said Uto Shinohara, managing director and senior investment strategist at Mesirow.
"Investors are waiting for more information to act as a catalyst. ... In the meantime, the trimming of long dollar positions and covering Euro and Sterling shorts following the dollar's recent pop can be expected as the market awaits the release of FOMC meeting notes on Wednesday, hoping for clues revealing the pulse of the Fed."
Sterling was up 0.35% at $1.2035 while the euro rose 0.24% to $1.0694, after earlier falling to $1.06125, the lowest since Jan. 6. European Central Bank (ECB) officials have also made clear that they expect euro zone rates to keep rising.