Home Daily Commentaries USD retreats from 3-month high as markets eye rate outlook

USD retreats from 3-month high as markets eye rate outlook

Daily Currency Update

The US dollar remains weak as it continues its decline against its major rival currencies. The dollar index (DXY) trades near 103.620. Today's drop in the dollar comes as a response to a surprise rate hike by the Bank of Canada (BoC), which has hinted that the Federal Reserve might need to take further measures to address inflation concerns. At present, traders are estimating a 70% probability that the Fed will leave its rates unchanged in the upcoming week, while there is a 30% chance for a 25-basis point (bps) increase. Data released today by the US Department of Labor revealed that Initial Jobless Claims amounted to 261,000 for the week ending on June 3, the highest reading recorded since October 2021.

Key Movers

The euro continues to increase against the USD as it trades above the 1.0750 level. The EUR/USD pair has gained momentum following the release of US jobs data, which led to renewed pressure on the US dollar, lending support to the rise in the currency pair. Data published today by Eurostat confirmed that the Eurozone economy experienced a contraction in the first quarter of 2023. The GDP in the Eurozone declined by 0.1% in the first three months of the year compared to the previous quarter. This revised figure contradicted the initial estimate of a 0.1% growth during the same period. Annually, Eurozone GDP expanded by 1%, which was lower than the 1.3% expected growth. In terms of employment, the Eurozone's Employment Change showed a 0.6% increase on a monthly basis and a 1.6% increase on a yearly basis.

The pound is gaining bullish momentum as it surges past the 1.25 level amid expectations of additional interest rate increases by the Bank of England (BoE). This sentiment was fueled by a forecast indicating that UK inflation is expected to remain elevated. According to the forecasts released by the Organization for Economic Cooperation and Development on Wednesday, Britain is projected to have the highest inflation among major economies in 2023, reaching 6.9%. Money markets have priced in a 25 bps rate hike by the BoE on June 2.

USD/CAD is recovering to the 1.3360 mark amid a strong rebound in oil prices and growing expectations of an additional rate hike by the BoC. Despite the unexpected rate hike announcement by the BoC, the Loonie is facing challenges in asserting dominance over the USD. BoC Governor, Tiff Macklem surprised markets by increasing rates by 25 bps to 4.75%. However, even with the strength of the Canadian economy, the monetary policy is seen as insufficiently restrictive in controlling inflation. Oil prices have reached a 3-day high at $73.20. This rise is driven by state-run banks in China reducing their lending rates to bolster economic recovery.

Expected Ranges

  • EUR/USD: 1.0691 - 1.0774 ▲
  • GBP/USD: 1.2427 - 1.254 ▲
  • AUD/USD: 0.6662 - 0.6711 ▲
  • USD/CAD: 1.3337 - 1.3392 ▼