Inflation, Interest Rates Sway Currency Trajectory

(RTTNews) - The updates on inflation and the response of central banks tasked with taming it, shaped currency market sentiment for much of the week ended December 16.

Inflation readings were released from the U.S., Euro Zone, U.K., Germany, France, etc., whilst the Federal Reserve, European Central Bank, Bank of England, Swiss National Bank etc., announced interest rate hikes.

Markets began last week with heightened anxiety over how much cooler, inflation would be in the U.S. and major economies. It responded to the data showing easing price-pressures by building up expectations of a monetary policy pivot by major central banks.

Fed fears lifted the Dollar and the Dollar Index at the onset of the new week. The Dollar Index, which had closed at 104.81 on December 9, opened the new week a tad higher at 104.93 and steadily surged to the week's high of 105.25 on Monday itself.

With Tuesday's data from the U.S. showing headline inflation softening more than expected, to 7.1 percent from 7.7 percent earlier and core inflation easing beyond expectations, to 6 percent from 6.3 percent in the previous month, the Dollar retreated. DXY fell to 103.98 by close on Tuesday. Amidst increasing expectations of a Fed pivot, the DXY touched the week's low of 103.45 on Wednesday.

The Dollar's retreat was a reflection of the market's strong expectations of a decisive Fed pivot. What the markets did not prepare for was a Fed that would warn of more rate hikes and raise the peak rates more than what was projected in September. The unexpected harshness and hawkishness on the part of the Fed lifted the Dollar and the Dollar Index rebounded to 104.88 by Thursday. Amidst the unexpected market turbulence, the DXY closed the week at 104.70, edging down 0.10 percent in the week.

The EUR/USD pair strengthened around half a percent in the week ended December 16. After opening on December 12 at 105.28, the pair weakened to the week's low of 105.06 on Monday, amidst anxiety ahead of the release of the U.S. CPI numbers. The pair touched a high of 1.0737 on Thursday in the backdrop of the ECB raising rates by 50 basis points, to levels not seen in the past fourteen years. The pair finished the week at 1.0582.

The GBP/USD pair dropped almost a percent from 1.2255 at close on December 9, to 1.2140 at close on December 16. The pound ranged between $1.2448 touched on Wednesday and $1.2119 on Friday in a week that saw the Bank of England raising rates by 50 basis points to push the cost of borrowing to the highest level since late-2008.

The DXY is currently at 104.61. The EUR/USD pair is at 1.0600 and the GBP/USD pair is at 1.2158.

The spotlight of the ongoing week would be the PCE readings, the Fed's preferred inflation gauge, due on Friday. Inflation readings are due from Canada on Wednesday and Japan on Thursday. The Bank of Japan's Monetary Policy meeting is scheduled for release on Tuesday.