FOMC Minutes, PCE Data Drive Dollar Ahead

(RTTNews) - Currency market movements in the week spanning February 20-24 were determined to a great extent by anxiety ahead of the release of the minutes of the previous FOMC. Though economic data releases from other regions as well as the address by the Bank of Japan Governor nominee were keenly watched, FOMC minutes and the perceptions regarding the likely course of U.S. monetary policy was the most dominant influence.

Uncertainty surrounding the monetary policy in the U.S. amidst the Fed's acknowledgement of a disinflationary process on the one hand, and economic data that pointed to a resilient economy on the other hand, shored up sentiment in favor of the greenback ahead of the release of the minutes of the Federal Open Market Committee held between January 31- February 1. Hawkish comments from Fed officials as well as persisting geopolitical tensions exacerbated the Dollar's surge during the past week.

The DXY or the Dollar Index which measures the strength of the Dollar against a basket of 6 currencies strengthened from 103.86 on Friday, February 17 to 104.18 by Tuesday. Though the DXY touched a low of 103.76 on Monday, it rallied further after the minutes released on Wednesday showed that some participants even called for a 50-basis points hike in the previous review. The perception that the Fed would have to raise rates higher than originally perceived and keep it high for longer than anticipated, lifted the Dollar.

Data that showed the Fed's preferred PCE-based inflation readings accelerated in January not only reinforced the persistence of inflation but also justified further aggressive action by the Fed. The core PCE price index increased 0.6 percent on month in January, above the 0.4 percent expected. The annual reading climbed to 4.7 percent from 4.6 percent earlier and versus expectations of 4.3 percent.

The Dollar Index touched the week's high of 105.32 on Friday before closing the week at 105.21. The DXY gained 1.3 percent during the Fed-heavy week. It is currently at 104.82.

The Dollar's strength amidst the Fed's potentially fierce inflation combat eclipsed the hawkishness in the ECB's rhetoric. The EUR/USD pair shed 1.4 percent during the week, falling from 1.0694 on February 17 to 1.0546 by February 24 amidst disappointing manufacturing activity in some major economies. From the week's high point of 1.0705 touched on Monday, the euro dropped to touch a low of 1.0536 on Friday. The pair is currently at 1.0601.

The British pound too depreciated against the Dollar, albeit on a lesser scale. The GBP/USD pair dropped from 1.2035 on February 17 to 1.1944 on February 24, losing 0.76 percent. The pair touched a high of 1.2148 on Tuesday and a low of 1.1928 on Friday. The pair is currently at 1.2039.

The keenly anticipated address by Kazuo Ueda, the nominee for the post of Governor of the Bank of Japan, in the Japanese parliament on Friday was a major influence for the USD/JPY pair. Markets were keen to know whether the change of regime at the Bank of Japan would imply a change of stance in the monetary policy as well and what fate would befall the dovish yield curve control policy. However, much to the disappointment of those betting on the yen's strength, the nominee assured the parliament that the monetary policy would continue to be accommodative to support the economy.

The yen depreciated against the Dollar, lifting the USD/JPY pair which had touched a low of 133.92 on Monday to as high as 136.53 on Friday, before making a minor recovery and closing the week at 136.46. The USD/JPY pair which had closed the previous week at 134.15, gained 1.72 percent during the past week. the pair is currently at 136.05 amidst anxiety over how the BOJ would tackle inflation which is at a 41-year high and when it would eventually end the yield curve controls.

The Australian Dollar nursed deep losses, shedding 2.2 percent against the Dollar in the week ended February 24. During the course of the week, the AUD/USD pair declined to 0.6725, from the level of 0.6879 at the end of the previous week. Minutes from the Reserve Bank of Australia released on Monday had shown that policymakers had considered raising rates by 50 basis points to control sticky inflation. The pair ranged between a high of 0.6921 touched on Monday and the low of 0.6718 touched on Friday. The pair is currently at 0.6732.

On the horizon are the inflation readings due from Germany, France, and Euro Area. The GDP data from Australia due on Tuesday would invariably form an input for the Reserve Bank of Australia in its interest rate review due on March 6. PMI readings from the U.S., Consumer Confidence data from Japan, unemployment readings from the Euro Area, etc. would also sway sentiment in the currency market in the days to come.