Dollar index down pre-Fed, euro holds as EU skirts recession

Euro shows mild gains against the dollar as data shows EU escaped recession in Q4

The euro remained stable on Tuesday following the release of data indicating that the eurozone barely escaped a technical recession in the last quarter, while the U.S. dollar saw a slight decline as market participants awaited the Federal Reserve's decision on monetary policy later in the week.

The Eurozone's Gross Domestic Product (GDP) showed no growth in the fourth quarter compared to the preceding three months, with significant contributions from robust growth in Spain and Portugal and a slight uptick in Italy's economy. Germany's economy notably contracted in the last quarter of 2023.

The euro saw a modest increase of 0.08% against the dollar, with the EUR to USD pair trading at $1.0843 amidst anticipations of a more robust U.S. economic outlook compared to the eurozone. This has led investors to fully price in an interest rate cut by the European Central Bank (ECB) come April.

The single currency is down by close to 1.7% in January, having reached a near seven-week low on Monday.

Analysts at UniCredit commented on the dynamics to the Reuters news agency:

"Risks remain tilted to the downside for the single currency as long as these rate-cut expectations prevail among investors”.

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U.S. data on job openings, Fed meeting in focus

Upcoming data on U.S. job openings from the Department of Labor Statistics will serve as an introduction to the eagerly awaited payroll report set for release on Friday.

The U.S. dollar index (DXY) — a gauge of USD’s strength against a basket of six major currencies — dipped by 0.06% to 103.40, with market participants proceeding with caution ahead of the Federal Reserve's two-day meeting starting Tuesday.

With expectations leaning towards the Fed keeping interest rates unchanged, the focus will shift to Federal Reserve Chair Jerome Powell's remarks at Wednesday's press conference and any indications of potential rate reductions in the foreseeable future.

Markets.com Chief Market Analyst Neil Wilson weighed in on the Federal Reserve meeting and the U.S. central bank’s stance on interest rates in his morning notes on Tuesday:

“The thinking on rates I’m reading is that a little easing now will mean they don’t have to aggressively cut when the labour market craters — a little cutting now stops unemployment going higher. It’s the new fine-tuned Fed in action — rapid disinflation requires some modest cutting to get things back on track. It’s also probably got something to do with being an election year and as we discussed in Overleveraged (our new podcast), there is bit of front-loading of cuts now to ensure they are not rushing into cuts this summer just before the election. The risk is that they're pivoting a bit early and inflation plateaus — and then re-accelerates. Yields declined with the US 10yr Treasury at 4.05% as the Treasury cuts its Q1 borrowing estimate to $760bn, less than expected. The less issuance the more yields can come in”.

Michael Pfister, FX Analyst at Commerzbank, told Reuters:

"After Fed Chairman Jerome Powell's dovish comments at the press conference following the last meeting, market participants are likely to be looking for more precise information on the timing of the first rate cut”.

Market odds currently suggest a 46.6% likelihood of the U.S. central bank initiating rate cuts by March — a decrease from 73.4% one month earlier, as per the CME Group's FedWatch Tool. Data has been suggesting that the U.S. economy remains resilient in the face of multiple headwinds.

The series of U.S. employment data starting with Tuesday's job opening figures and culminating in Friday's January U.S. payroll report will offer further insights into the status of the world's largest economy.

Ahead of the Bank of England monetary policy meeting later this week, the British pound dropped by 0.2% to $1.2680.

The U.S. dollar also fell by 0.1% against the Japanese yen, with the USD to JPY exchange rate dipping to around 147.37, but later recovering to 147.50.

As speculation grows regarding a potential policy normalization by the Bank of Japan (BOJ) in the second quarter, pending additional wage data, the dollar-yen exchange rate is likely to be influenced more by Fed expectations, according to analysts.

Japan's unemployment rate decreased to 2.4% in December, slightly below economists' median prediction of 2.5% in a Reuters poll, as reported by government data on Tuesday.

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