The dollar continued to weaken against major currencies on Thursday as risk appetite dominated financial markets. On Friday, Eurostat will release the euro zone's reconciled inflation rate for March and the unemployment rate for February. Later in the day, the Fed's preferred measure of inflation, the personal consumption expenditures (PCE) price index, will be in focus. With today being the last trading day of the month and first quarter, positioning could exacerbate market volatility and lead to wild swings ahead of the weekend.
Wall Street's main indexes closed higher on Thursday, thanks to strong gains in technology and real estate stocks. Following a modest rebound on Wednesday, the U.S. dollar index remained under downward pressure and recorded its lowest level since early February near 102. The U.S. dollar index rebounded slightly early Friday, but struggled to gather upward momentum.
In the US, all attention will be on inflation as measured by the PCE along with the release of personal income/spending and the final Michigan Consumer Confidence Index. Data released by the U.S. Bureau of Economic Analysis on Thursday showed that the final value of GDP in the fourth quarter increased by 2.6% year-on-year, pinching 2.7%. The annual rate of the core PCE price index is expected to remain unchanged at 4.7% in March.
EUR/USD climbed above 1.0900 during the U.S. session on Thursday, posting four straight sessions of gains, before retreating on Friday amid disappointing German economic data and renewed buying interest in the greenback. Earlier in the day, data from Germany showed that retail sales fell 1.3% on month in February. A rise of 0.5% was expected, while the March jobs report showed that the number of unemployed rose by 16,000 and the unemployment rate rose to 5.6%. This increases pressure on the ECB to tighten monetary policy further.
Meanwhile, France's annual reconciled inflation rate fell to 6.6% in March from 7.3% in February, compared with market expectations of 6.5%. Separate data showed that Spanish consumer prices rose 3.3% year-on-year in March, the smallest increase since August 2021 and below analysts' expectations.
The European Central Bank has made clear that future rate hikes will depend on economic data and has raised its key deposit rate by 350 basis points to 3 percent since July in an effort to curb surging inflation.
Meanwhile, expectations of further rate hikes by the European Central Bank as soon as its May meeting continued to provide support to the pair's upside momentum, especially as speculation that the Federal Reserve may decide to keep rates on hold at its next meeting continued to gather momentum.
"There is a divergence emerging between the ECB and the Fed, which will weigh on the dollar," said Bipan Rai, head of foreign exchange strategy at CIBC Capital Markets.
GBP/USD rose above 1.2420 in the Asian market to hit the highest level in 3 months, then experienced technical adjustments and retreated below 1.2400 in the early European market. UK Gross Domestic Product (GDP) grew by 0.1% quarter-on-quarter in the fourth quarter (Q4), compared with a previous forecast of 0.0%, figures from the Office for National Statistics showed on Friday, while annual figures appeared to be even more impressive, with fourth Quarterly GDP rose 0.6% year-on-year, compared to the previous forecast of 0.4%. Notably, UK national house prices in March and total business investment in Q4 underperformed, likely testing GBP/USD bulls ahead of key US data.
Even so, optimism surrounding the UK's £1.8 billion trade deal with the trans-Pacific nation, along with Brexit optimism, favored the bulls. In this regard, the British "Financial Times" said, "Britain announced on Friday an agreement to join the 11-member Asia-Pacific trade bloc, which Prime Minister Rishi Sunak claimed proved his government was seizing the 'Brexit'. Freedom after Europe'."
News indicating rising inflation and hawkish concerns from the Bank of England (BoE) is also positive, as Reuters puts it, "UK businesses are the most confident this month since May 2022 and pricing expectations are on the Bank of England's radar, Because a survey from it on Friday showed high inflation had fallen to a six-month low."
On the other hand, an easing of hawkish Fed bets and mixed U.S. data ahead of February's core personal consumption expenditures (PCE) price index, as well as fading pessimism surrounding the global banking sector appeared to weigh on the greenback.
Notably, the latest pullback in U.S. Treasury yields allowed the dollar to recoup recent losses and weighed on GBP/USD as traders awaited inflation data amid hawkish Fed talks.
Following Wednesday's modest retreat, USD/JPY regained positive momentum on Friday on the final day of the week and maintained its bid tone near two-week highs during the early European session, just below mid-133.00. Data from Japan showed that industrial production rose 4.5% month-on-month in February. In addition, Tokyo's consumer price index rose at an annual rate of 3.4% in March from 3.2% in February.
The recent risk-on rally in global equities has weakened the safe-haven Japanese yen (JPY), while the emergence of Japanese yen (JPY) and some dollar (USD) buying has helped the USD/JPY pair. Investors now seem convinced that a widespread banking crisis may have been avoided.
Beyond that, hopes for a strong recovery in China's economy further boosted investor confidence. China's official PMI data showed business activity in the services sector grew at the fastest pace in 12 years in March. Meanwhile, growth in the manufacturing sector slowed slightly in the reported month, although at a slower pace than expected.
On the other hand, the greenback found some support from a modest rise in U.S. Treasury yields amid renewed speculation that the Federal Reserve may return to its inflation-fighting rate hikes. In addition, on Thursday, three Fed officials supported further interest rate hikes to reduce high inflation levels. However, the U.S. central bank recently indicated that it may soon pause its rate hike cycle following turmoil in the banking sector. In turn, this could be negative for the USD/JPY pair.
Traders also appeared reluctant to make big bets, perhaps preferring to stay on the sidelines ahead of the release of the U.S. core PCE price index - the Fed's preferred inflation gauge - later in the North American morning. The data will play a key role in influencing market expectations on the path of future rate hikes, which in turn will drive demand for the dollar and provide fresh directional momentum for the USD/JPY pair. Still, spot prices are on track for their first strong weekly gain in the past five years.
The U.S. dollar fell 0.59% against the Swiss franc on Thursday, closing at 0.9127, the lowest closing price in nearly two weeks. The easing of concerns about the banking industry also provided opportunities for the Swiss franc to rebound.
Gold prices recovered decisively on Thursday and continued higher on Friday. Spot Gold is currently slightly above $1980.
Bitcoin reversed course after rising above $29,000 and closed lower on Thursday. Prices are currently hovering around $27,000. Ethereum’s direction was unclear on Thursday and continued to trade sideways around $1,800 on Friday.