Home Daily Commentaries USD builds as decline in jobless claims boosts rate-hike expectations

USD builds as decline in jobless claims boosts rate-hike expectations

Daily Currency Update

Investors are evaluating the monetary policy outlook as the US dollar index (DXY) remains above 100. The most recent data indicates a strong demand for workers, with weekly claims dropping to a two-month low, but continuing claims have risen the most in over three months. The Federal Reserve’s final 25 basis point rate hike of the year is expected to take place during the upcoming meeting next week amid easing inflationary pressures. The Philadelphia Fed Manufacturing Index showed minimal variation, declining slightly to -13.5 from -13.7 in June. This result was below market expectations, as analysts predicted an index of -10. The persistently negative index value indicates an ongoing decline in manufacturing activity.

Key Movers

The euro strengthened against the USD, surpassing 1.12 and reaching its highest point since February 2022. This growth is attributed to investor expectations that the European Central Bank (ECB) will continue raising interest rates to address inflation and bring the overall inflation rate closer to the 2% target. Inflation did decline in June to 5.5%, the lowest in 17 months. However, the core inflation rate remained stubbornly high at 5.4%, still close to the record high of 5.7% in March. Currently, the interest rates in the Eurozone are at 3.5%. Recent weak economic data from various regions within the Eurozone may prompt the ECB to revise its inflation forecasts in September.

After a calm early European session, the pound reversed direction and fell to a new low below 1.2900 against the dollar. Data indicating a decrease in inflationary pressures in the UK has led to suggestions that the Bank of England (BoE) might not need to raise interest rates as significantly as initially anticipated. The inflation rate eased to 7.9% in June, the lowest level since March 2022, and slightly below the market consensus of 8.2%. This reading aligns with the BoE’s projections made in May. The core inflation rate remained at 6.9%, which is not far from the previous period’s 31-year high of 7.1%.

The CAD strengthened against the USD for the fourth consecutive day due to optimistic expectations for crude oil, Canada's primary export. However, the initial gains were later reversed with the USD/CAD pair trading near 1.3190 as the USD recovered. Another contributing factor to the Loonie’s strength was the possibility of the Bank of Canada (BoC) maintaining higher interest rates to combat ongoing inflation. This contrasts with market expectations that the US Federal Reserve will implement rate cuts earlier, specifically in the first half of 2024. West Texas Intermediate (WTI) crude oil futures stabilized around $75 per barrel following a period of increased volatility. Traders remain focused on evaluating the oil market's prospects for the second half of the year. Earlier this week, oil prices received a boost when China's top economic planner announced its commitment to new policies that will enhance consumption in the world's leading crude importer.

Expected Ranges

  • EUR/USD: 1.1143 - 1.1227 ▼
  • GBP/USD: 1.285 - 1.2962 ▼
  • AUD/USD: 0.676 - 0.6846 ▼
  • USD/CAD: 1.312 - 1.3188 ▲