Dollar rises as data suggests more Fed patience on rate cuts

The US Dollar (USD) nudged higher on Thursday after a volatile two days that saw sharp declines followed by a rebound as traders took incoming economic data as signalling the Federal Reserve will wait longer before cutting interest rates.

The dollar index – which tracks the U.S. currency against six other units – rose 0.2% to 104.53. It fell by 1.51% plunge on Wednesday – its largest drop for a single trading day in a year.

The euro was flat around $1.084 , while sterling was down 0.2% at $1.2385. The dollar was down 0.1% against the yen at 151.27.

The US Dollar drew some support from better-than-expected retail sales combined with more signs of cooling inflation, feeding into the narrative for an economic “soft landing”, which would give the Fed more time before cutting rates.

“We’re seeing the dollar trading weaker versus other currencies today, off the back of those retail sales that are putting a dampener on those hopes that, potentially, we could see a rate cut sooner rather than later,” Hargreaves Landsdown strategist Susannah Steeter said.

“Session by session, sentiment is really fluctuating on this. The Fed has said it’s driven by the data so that is what is driving the market specifically.”

Traders remain certain that rates will not go higher, but have trimmed the odds for a first reduction by March to less than 1-in-4 from better than 1-in-3 a day earlier, according to the CME Group’s FedWatch Tool.

“While inflation is falling, the economy remains robust, which might even allow the Fed to increase rates if they chose,” said James Kniveton, senior corporate FX dealer at Convera, while noting there doesn’t seem to be appetite for a hike among Fed officials currently.

Deutsche Bank strategist Jim Reid on Thursday cited research from his bank’s economists that showed in the last two years, this is the seventh occasion on which markets have priced in a swift shift by the Fed to rate cuts. On the previous six, those expectations entirely unwound.

“At some point there will be a dovish pivot, and this could be closer than the others to it, but be wary that we’ve now been to this well seven times in two years,” Reid said.

Elsewhere, the Aussie eased 0.5% to $0.6479, while the New Zealand dollar fell 0.8% to $0.598.

The Australian currency failed to draw support from a strong rebound in employment, as traders keyed on the fact that gains were mostly in part-time labour, while the jobless rate actually ticked higher.