Currency Market is Hibernating

The U.S. Dollar has been trading mostly neutral this week, with its index adding a marginal 0.1% to reach 104.17 points. The EURUSD fell by 0.16% to 1.07650. The currency market appears to be in a state of hibernation, and this trend may continue throughout February.

Investors anticipate little direction in the market until March, although some volatility could be introduced by consumer sector data this week. The WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) reported capital inflows of $9.0 million last week, However, the overall balance for the year remains negative at -$15.0 million. Average weekly outflows and inflows have also dropped by 50% to $7.5 million in 2024 compared to the average numbers in 2023.

This decline in flows occurred amid significant developments in Federal Reserve (Fed) monetary policy. The hawkish stance of the regulator led to a reduction in bets for interest rate cuts in March to 13.5%, down from 76.0% in early January. The U.S. 10-year Treasuries yields rose to 4.20% from 3.80%. Despite these factors supporting the Dollar, investors seem to be overlooking the macroeconomic strength of the currency, emphasizing the hibernating state of the currency market.

In this scenario, the U.S. Dollar may return to its average exchange rates, such as 1.08500 for the EURUSD. A fall even lower to 1.09500-1.10500 may be necessary to align with the historical average. However, without clear directional movements in the market, it seems to be driven by inertia.

Consumer sector macroeconomic data is expected to be released in the United States this week, with anticipation for a slowdown in inflation. The outcome of these releases may influence the direction of the U.S. Dollar. If inflation expectations are confirmed, the Dollar could revert to its average. On the other hand, if inflation does not slow down, the existing overbought tension in the Greenback may increase, potentially sending the EURUSD to 1.06500.

Richmond Federal Reserve Bank President Thomas Barkin has suggested that for the Fed to lower its rates, inflation should slow down in the real estate market and the service sector. The Fed's hawkish stance has been influenced by the rise in oil prices, which have increased by 7.0% since the beginning of the year. Further increases in oil prices could discourage the Fed from cutting rates in May or June. So, the market is awaiting signals from the Fed in March to determine the direction of the Dollar.