US dollar retreats as pace of tightening reassessed

Daily Currency Update

Demand for the US dollar weakened against a basket of major currencies on Monday as investors awaited a busy week of US data in focus.

Thursday’s Core PCE price index will be watched closely for signs of the Federal Reserve’s next move on interest rates. The reading is the central bank’s preferred barometer of inflation, which means market participants will watch the release closely for signs on whether the Federal Reserve’s aggressive rate hike projections are justified. A weak reading here, with comments from Jerome Powell last week that the global tightening of monetary policy maybe slower than first thought due to threats of global recession, could put currencies on the back foot. Especially those who have been inflated by interest rate hike speculation.

The market will also closely watch Jerome Powell speak on Wednesday at the European Central Bank’s forum in Portugal, looking for any further rhetoric around recession and interest rates from the central bank chair. On Friday US PMI data will be released, an indicator of the economy and its output. With potential interest rate hike speculation, a weak reading here could again set back such speculation. After Powell’s comments last week, the market appears to have shifted towards pricing the start of a Fed easing cycle in late 2023. USDCAD was down 0.15% trading around 1.2870 at the time of writing.