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Forex Today: Dollar tumbles on Fed's pivot despite US economy still outperforming

In the last full week of 2023, volume will likely start to fade ahead of the holidays. However, the economic calendar shows many relevant events. Regarding central banks, the focus will be on comments from policymakers after a series of monetary policy meetings, including those of the Fed, the ECB, and the BOE. Next week, the Bank of Japan will have its meeting. The most important report form the US will be the core PCE.

Here is what you need to know for next week: 

The US Dollar Index (DXY) resumed the downward trend and posted the lowest weekly close since July after the Federal Reserve's December meeting. The forecast of rate cuts by some FOMC members weighed on the US Dollar and boosted US yields. The Fed's "pivot" fueled a rally on Wall Street, leading to a record close in the Dow Jones.

The decision of other central banks, such as the European Central Bank (ECB) and the Bank of England (BoE), also contributed to the weakness of the US Dollar, as they kept rates unchanged but did not signal a pivotal shift and maintained a hawkish tone. However, this divergence in monetary policy may be temporary, as the strong US economic conditions continue to outperform. 
Market participants see the Fed cutting rates next year but after other central banks. 

Next week, US housing data will be released, including Building Permits and Housing Starts on Tuesday, Existing Home Sales on Wednesday, and New Home Sales on Friday. On Thursday, a new estimate of Q3 GDP is due, along with the weekly Jobless Claims and the Philly Fed Manufacturing Index. The critical report of the week will be released on Friday with the Core Personal Consumption Expenditure Price Index.

EUR/USD rebounded from the 20-week Simple Moving Average (SMA), which is a positive sign. However, the Euro struggled to stay above 1.1000, similar to two weeks ago. On Monday, the German IFO Business Climate Index is expected to show a modest improvement. Eurozone will release the final reading of the Harmonized Index of Consumer Prices for November. Germany will also release the Producer Price Index on Wednesday.

Analysts at Commerzbank on Eurozone economy:

The PMI for the services sector, the most reliable economic barometer for the euro area, fell again in December by 0.6 points to 48.1. This confirms our expectation that the euro area economy will continue to contract in Q4, contrary to the ECB's expectations. At 44.2, the corresponding manufacturing index also offers little hope of a turnaround. Today's data is therefore likely to fuel speculation about an imminent ECB rate cut. However, with underlying price pressures still strong, the ECB is unlikely to start cutting rates before the summer.


The Japanese Yen was among the best performers. USD/JPY has fallen 1000 pips during the last five weeks, approaching 140.00. The Bank of Japan will have its monetary policy meeting and announce its decision on Tuesday. No change is expected, but the anticipation surrounding the next steps in policy and speculation about the potential beginning of the end of ultra-loose monetary policy has been supporting the Japanese Yen. Additionally, the National Consumer Price Index is due on Friday.

GBP/USD initially traded near 1.2800 but later pulled back below 1.2700. However, it experienced an overall rise during the week and maintained a bullish tone. Important inflation data from the UK is scheduled for release on Wednesday, which could have a significant impact on the Pound, especially after the recent Bank of England meeting where policymakers maintained a hawkish stance, providing support to the currency. The Consumer Price Index (CPI) is expected to show a 4.4% increase compared to the previous year in November, slightly lower than the 4.6% recorded in October. Furthermore, public borrowing figures are due on Thursday. On Friday, the UK will report Q3 growth data and November Retail Sales.

NZD/USD posted the highest weekly close in months and tested levels above the 100-week Simple Moving Average (SMA). The short-term sentiment for the New Zealand Dollar remains bullish. On Tuesday, New Zealand will release trade data, and the NZ Business Confidence survey is also due.

AUD/USD rose above 0.6700 to its highest level since July, benefiting from a weaker US Dollar across the board and increased risk appetite. On Tuesday, the Reserve Bank of Australia (RBA) will release the minutes of its latest meeting.

USD/CAD suffered the worst week in months, falling below 1.3700 to its lowest level since August. Inflation data, which is due on Tuesday, will be a key report in Canada. The Consumer Price Index (CPI) is forecasted to show a decrease of 0.2% in November, with the annual rate declining from 3.1% in October to 2.9% in November. The Bank of Canada (BoC) will release the summary of deliberations on Wednesday. On Friday, the monthly GDP report will be released, with October figures expected to show a 0.2% expansion.


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Author

Matías Salord

Matías started in financial markets in 2008, after graduating in Economics. He was trained in chart analysis and then became an educator. He also studied Journalism. He started writing analyses for specialized websites before joining FXStreet.

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