China’s Inflation May Slow Down the Dollar

The U.S. Dollar index (DXY) experienced a 0.4% increase, reaching 104.35 points this week. The EURUSD is down by 0.3% to 1.07500. Other major currencies show mixed performance against the Dollar, with the pound losing 0.6% and the New Zealand Dollar strengthening by 0.1%.

The Dollar exhibited strength on Monday, with the EURUSD decreasing by 0.6% to 1.07230, marking its lowest point since December 8. This apparent resilience of the Dollar is attributed to robust macroeconomic data and the hawkish stance of Federal Reserve (Fed) Chair Jerome Powell. However, as the impact of these factors wanes, the Dollar appears to retreat more easily.

The surprise strength in the U.S. labor market report for January, contrary to expectations of a cooling trend, caught investors off guard. Unemployment remained steady at 3.7%, missing the anticipated 3.8%. Average hourly earnings rose by 0.6% MoM, surpassing the expected 0.3% and the 0.4% reported in December 2023. The most unexpected was the Nonfarm Payrolls, adding 353,000 new jobs compared to the expected 185,000. Additionally, December 2023 data was revised upward to 333,000 from 216,000.

These developments led to a decline in bets on interest rate cuts in March to 15.5%, down from 46.0% at the beginning of the last week and 76.0% a month ago, according to the CME FedWatch Tool. U.S. 10-year Treasuries yields surged to 4.10% from 3.81%, and the Dollar strengthened by 0.7% last week, erasing early losses of 0.4%. Federal Reserve (Fed) Chair Jerome Powell's reaffirmation of these points during a "60 Minutes" interview further emphasized the positive sentiment.

Minneapolis Federal Reserve President Neel Kashkari supported Powell by stating that a strong economy can afford policymakers more time before considering the first interest rate cut. “This constellation of data suggests to me that the current stance of monetary policy … may not be as tight as we would have assumed given the low neutral rate environment that existed before the pandemic,” Kashkari wrote in his essay. This commentary suggested that the current monetary policy stance may not be as tight as assumed, considering the low neutral rate environment before the pandemic.

Despite positive data, investors seem somewhat disappointed with the Dollar. WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) reported minor capital inflows last week, maintaining a net outflow since the beginning of 2024. Investors appear to expect the Fed to cut rates this year, with the timing of the first cut not being a primary concern.

Limited upside opportunities are foreseen for the Greenback from a technical perspective. The EURUSD is trading near a robust support level at 1.07500-1.07700, suggesting an anticipated rebound from this level. While there are possibilities of further decline to 1.06500-1.06700, this outcome will depend on China's government stimulus measures and inflation trends.