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Dollar Rallies Modestly From Recent Lows as Markets Anticipate PCE Inflation Data

1 December 2023 Written by Stephane Dubois  Senior Market Analyst Stephane Dubois

The U.S. dollar has seen a slight uptick in early European trading, indicating a cautious recovery. Despite this, the greenback hovers near a three-month low, underscoring a tense anticipation in the financial markets. This cautious sentiment prevails as investors and analysts alike await a crucial U.S. inflation report, expected to shed light on future monetary policy directions.

As of early Thursday, the Dollar Index, a critical measure of the U.S. dollar against a selection of six major currencies, shows a modest increase of 0.4%, reaching 103.120. This uptick is a slight rebound from the 102.46 level marked on Wednesday, the lowest since August 10. Such fluctuations highlight the dollar's current volatility in the global financial markets.

Inflation and Economic Growth Indicators

The dollar's recent resilience can be partially attributed to updated data indicating a more robust U.S. economic growth in the third quarter than initially estimated. However, this upturn is tempered by a 3.2% decline in the dollar's value throughout November, marking its most significant monthly drop in a year. This decline reflects increasing market expectations that the Federal Reserve may lower interest rates in the first half of 2024.

These rate cut expectations gained momentum following comments from Federal Reserve Governor Christopher Waller, known for his typically hawkish stance. Waller's openness to a potential rate cut, contingent on continued inflation decline, has significantly influenced market dynamics. Consequently, all eyes are on the upcoming release of the personal consumption expenditures price index, the Fed's preferred inflation measure. Particularly, the core reading, which excludes volatile food and fuel costs, is projected to show a year-over-year increase of 3.5%, a decrease from the previous month's 3.7%, and the lowest since mid-2021.

Euro's Performance Amid Inflation Data

In Europe, the EUR/USD pair reflects a 0.4% decrease, trading at 1.0924. The euro's retreat comes ahead of the latest eurozone inflation data release. The expected decline in November's eurozone CPI to 2.7% year-over-year, from 2.9% previously, aligns with Germany's reported inflation easing to 2.3% in November, surpassing expectations. However, news of France's economy contracting by 0.1% in the third quarter, against the anticipated 0.1% growth, further pressured the euro.

The British pound also shows a downward trend, with GBP/USD falling 0.2% to 1.2671, drifting away from the three-month high seen earlier in the week. Meanwhile, in Asia, the yen demonstrates a marked recovery against the dollar. The USD/JPY pair trades slightly lower at 147.18, despite underwhelming Japanese retail sales and stagnant industrial production figures in October. The yen's rebound from near 33-year lows in November is noteworthy, potentially marking its best monthly performance since the government's intervention in currency markets last year.

Chinese Yuan and Economic Indicators The USD/CNY pair sees a slight decrease to 7.1295, following a stronger midpoint fix by the People’s Bank of China. However, the yuan's gains are limited, as evidenced by the purchasing managers index data indicating a persistent decline in Chinese manufacturing activity. The global currency market currently exhibits a complex interplay of economic indicators, inflation data, and central bank policies. As the world's financial eyes turn to the upcoming U.S. inflation report, the dollar's trajectory hangs in a delicate balance, poised to respond to new economic insights and policy directions.

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