HomeForexThe US dollar decreases as uncertain economic data prompts expectations of mid-year...

The US dollar decreases as uncertain economic data prompts expectations of mid-year rate cuts by the Fed.

US Dollar Falls Amid Mixed Data, Fed Rate Cut Expectations

Dollar’s Decline Continues

The dollar extended its losses for a second consecutive day as mixed economic data raised expectations of an imminent rate cut by the Federal Reserve. The dollar fell 0.3% to 104.36 against a basket of currencies, while it slid 0.5% against the yen to 149.87.

Market Alert for Possible Japan Intervention

Traders are closely monitoring the dollar/yen pair as it approached the critical level of 150, prompting concerns about potential intervention by Japan to weaken its currency. Despite unexpectedly weak GDP figures, the yen strengthened, causing Japan to lose its position as the world’s third-largest economy to Germany.

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Weak Retail Sales Data

In the United States, retail sales in January fell by 0.8%, well below the expected decline of 0.1%. However, economists cautioned against overreacting to the sharp drop, attributing it to adverse weather conditions that typically lead to short-lived decreases in economic indicators like retail sales and housing starts.

Temporary Weakness in Economic Indicators

Chief Economist Bill Adams emphasized that the weakness in retail sales is likely temporary, given the impact of weather-related disruptions on consumer spending. He anticipates a quick reversal as conditions return to normal.

Fed’s Stance on Weak Retail Sales

Adams also noted that the Federal Reserve is likely to overlook the weak retail sales report for January, considering its transient nature due to weather-related factors.

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Positive Labor Market Data

On a positive note, initial claims for state unemployment benefits fell by 8,000 to a seasonally-adjusted 212,000 for the week ending February 10, indicating continued tightness in the U.S. labor market.

Industrial Production and Manufacturing Indices

Industrial production in the U.S. declined by -0.1% in January, marking the lowest level since October. However, the Empire State and Philadelphia Fed manufacturing indices showed improvements in February, suggesting resilience in the manufacturing sector.

Impact on Currency Markets

Despite the positive U.S. economic indicators, the dollar weakened against the Swiss franc and other major currencies. The euro gained 0.5% to $1.0782, while sterling climbed 0.2% to $1.2590.

Outlook on Dollar’s Momentum

Thierry Albert Wizman, global rates and FX strategist at Macquarie in New York, believes that the dollar’s pullback is temporary, expecting it to remain strong amid ongoing divergence between U.S. outperformance and global economic conditions.

Rate Easing Expectations

According to LSEG’s rate probability app, the federal funds futures market anticipates the first rate easing to occur at the June meeting, with an 83% probability. Rate futures have also priced in between three to four rate cuts this year, down from about five a few weeks ago.

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