Title: Dollar Steady, Sterling Crosses Weaken Ahead of US Inflation Data Release
Introduction:
In holiday-thinned trade, the dollar remains stable while sterling crosses experience losses. Traders are cautious as they await the release of the last major data of the year, which is the U.S. inflation figures scheduled for Friday. The recent drop in British inflation below expectations has led to a sharp decline in sterling against the dollar. Analysts predict a similar easing in the U.S. core personal consumption expenditure (PCE) data, with the annual inflation rate expected to reach its lowest level since 2021. However, given the recent weakness of the dollar and the already priced-in Federal Reserve cuts, further selling of the dollar is currently held off.
Heading 1: Sterling Suffers Sharp Drop Against Dollar Following Disappointing Inflation Figures
Sterling experienced its most significant decline against the dollar in two months after British inflation fell below forecasts to a two-year low of 3.9 percent in October. As a result, the currency fell by 0.7 percent to $1.2638, with traders factoring in potential Bank of England rate cuts as early as May. On Thursday, sterling hit a one-week low of $1.2618. Against the euro, the pound reached its weakest level in over three weeks at 86.78 pence.
Heading 2: Anticipation Builds for U.S. Inflation Data Release
Market analysts anticipate similar easing in the upcoming U.S. core personal consumption expenditure (PCE) data release. The annual inflation rate is projected to reach its lowest level since 2021 at 3.3 percent. However, due to the dollar’s recent weakness and the already priced-in Federal Reserve cuts for 2024, traders exercise caution and refrain from further selling of the dollar at present.
Heading 3: Cautious Trading Amidst Thin Liquidity and Data Surprises
As the festive season approaches, liquidity in the market becomes thinner, prompting traders to make adjustments in positions and reduce risks. Thin liquidity can amplify price movements in response to unexpected data surprises. Therefore, it is sensible for traders to exercise caution and pare back risks ahead of significant events such as the U.S. inflation data release.
Heading 4: Risk-Aversion Sentiment Influences Market
Heavy selling in the final hour of equities trade on Wall Street has triggered risk-aversion sentiment across markets. Despite stock futures stabilizing, the ripple effect of this risk-aversion has benefited safe-haven currencies like the yen. Japan’s upward revision of its growth projection for the fiscal year to 1.6 percent has further supported the yen, which rose approximately 0.2 percent against the dollar.
Heading 5: Limited Scope for Substantial Yen Appreciation
Goldman Sachs analysts highlight that market expectations for early action by the Bank of Japan (BoJ) next year are overly aggressive, considering the widespread disinflation narrative. The BoJ has retained its easing bias at its recent meeting, indicating limited potential for significant yen appreciation. This year, the yen has depreciated by over 8 percent against the dollar, primarily due to the BoJ maintaining negative short-term rates while the U.S. has implemented interest rate hikes.
Heading 6: Other Currency Movements and Market Indicators
The euro remains stable at $1.0941, while the Australian and New Zealand dollars trade slightly below Wednesday’s five-month highs. The dollar index, down 1 percent for the year, remains steady at 102.40. Ten-year Treasury yields reached a seven-month low of 3.847 percent on Wednesday. China’s yuan slipped as offshore yuan funding costs decreased, and the country’s blue-chip stock index hovered near five-year lows. Bitcoin briefly surged above $44,000 on Wednesday and currently maintains stability around $43,717.
Conclusion:
As the market awaits the release of the U.S. inflation figures, the dollar remains steady while sterling crosses face losses. Traders exercise caution amidst thin liquidity and potential data surprises. Risk-aversion sentiment influenced by heavy selling in Wall Street’s equities trade has benefited safe-haven currencies like the yen. Market analysts emphasize the limited scope for substantial yen appreciation, considering the BoJ’s easing bias and the disinflation narrative. Other major currencies and market indicators remain relatively stable.
