Data showing stubborn inflation in the U.S and the hawkish central bank commentary it triggered, dictated U.S. Dollar's movements through most of the week ended February 17. Market movements in other currencies too were dominated in some way or the other by sentiment surrounding the respective central bank's inflation combat and the expectations thereof.
Anxiety ahead of the release of the U.S. CPI data and geopolitical tensions lifted the Dollar at the commencement of the week. Amidst expectations that the annual CPI in January would fall to 6.2 percent from 6.5 percent earlier, readings showed CPI at 6.4 percent. Year-on-year core inflation, which was seen falling to 5.5 percent from 5.7 percent earlier, also dropped to 5.6 percent only. The report by the U.S. Bureau of Labor Statistics also showed that in the month of January, the Consumer Price Index rose 0.5 percent, after increasing 0.1 percent in December.
The negative inflation surprise, the assessment that disinflation less widespread than originally thought of, and the hawkish commentary by Fed officials that followed, provided enough ammunition to the Dollar. An unexpected jump in retail sales, an acceleration in producer price inflation as well as a less-than-expected number of Americans filing for unemployment benefits reinforced the resilience of the U.S. economy and exacerbated the Dollar's rally. Amidst calls for a 50-basis points rate hike in the next review, the Dollar Index (DXY), a measure of the Dollar's strength against a basket of 6 currencies, touched a high of 104.67 on Friday, a level last seen in the first week of January. The DXY's low point during the week was 102.59 touched on Tuesday.
Though the week saw a surge in the U.S. Dollar, the weekly addition to the Dollar Index was relatively modest. The DXY gained only 0.22 percent in the past week, strengthening from 103.63 on February 10 to 103.86 by February 17.
Aggressive warnings by officials of the European Central Bank on the risk of investors underestimating the persistence of inflation, given the strength of underlying price pressures and faster wage increases provided support to the euro during the week. The common currency of the Euro Zone gained 0.18 percent against the Dollar, strengthening to 1.0694 on February 17, from 1.0675 a week earlier. The EUR/USD pair ranged between a high of 1.0805 and a low of 1.0612 in the past week.
The British pound however depreciated 0.19 percent against the U.S. Dollar over the course of the week. The GBP/USD pair dropped to 1.2035 on February 17 from 1.2058 a week earlier. The pair touched a high of 1.2270 on Tuesday before touching a six-week low of 1.1914 by the end of the week, amidst data that showed retail sales in the U.K. rising by 0.5 percent in January. Markets were expecting it to drop by 0.3 percent.
The Australian Dollar weakened more than half a percent to the U.S. Dollar during the week amidst a weak jobs data report that showed unemployment rising to 3.7 percent versus expectations of 3.5 percent. The weakness in the job market which is seen reducing the headroom available for the Reserve Bank of Australia to raise rates further, dragged the Australian Dollar lower. The unexpected decline in the Westpac consumer sentiment index also dampened sentiment despite hopes of a demand boost from China. From the level of 0.6916 on February 10, the AUD/USD pair dropped to 0.6879 by February 17. The pair touched a high of 0.7030 on Tuesday and a low of 0.6811 on Friday.
The most significant movement was the Japanese yen's 2.1-percent depreciation against the U.S. Dollar. The USD/JPY pair finished the week ended February 17 at 134.15 versus 131.41 a week earlier amidst uncertainty over the monetary policy path likely to be pursued by the new head of Bank of Japan, rising inflation, and falling growth. During the course of the week the pair ranged between a low of 131.30 on Monday and a high of 135.13 on Friday. Though the yen had benefitted at the appointment of an economist to the top role at Bank of Japan, the rally fizzled over reports that he expressed support for the central bank's current position. Data released during the course of the week that showed the Japanese economy grew less than expected in the fourth quarter as well as the rise in U.S. treasury yields added to the yen's weakness.
Currency markets continue to be tethered to monetary policy cues. The release of the FOMC minutes on Wednesday as well as the inflation readings from Japan on Thursday and the PCE-based inflation readings from the U.S on Friday could provide further guidance on what lies ahead. Based on up-to-date expectations, the Dollar Index is currently at 104.21. The EUR/USD pair is hovering near 1.06 whereas the GBP/USD pair is close to 1.208. The USD/JPY pair is at 135.08. The Australian Dollar is currently trading at $0.6872.
