As we enter a new trading week, attention is focused on the recent performance of the US dollar. Last week, the dollar exhibited significant volatility, driven by shifting expectations around Federal Reserve rate hikes and disappointing economic data.
USD
The dollar experienced high volatility last week, with diminishing expectations of Fed rate hikes boosting it mid-week, pushing the dollar index up to 105.2. However, disappointing US economic data and easing inflationary pressures led to a decline by the end of the week. The dollar sank after the release of US GDP data on Thursday, which showed a slower-than-expected expansion of 1.3% in the first quarter. This decline continued on Friday following signs of cooling inflation, with the dollar index retreating to 104.6. US Treasury yields mirrored this pattern, with the 10-year bond yield rising to 4.63% mid-week before dipping to approximately 4.50% by Friday.
Core PCE Price index data released on Friday showed that inflationary pressures in the US are easing, putting additional pressure on the dollar. The Core PCE Price index rose by just 0.2% in April, slightly below expectations of 0.3% growth, and came in at 2.8% annually, marginally exceeding March’s 2.7%.
Disappointing US GDP data indicated that the economy expanded by only 1.3% in Q1, down from 3.4% in Q4 2023. This slowdown, coupled with a significant contraction in Pending Home Sales estimates for April, which fell by 7.5%, weighed heavily on the dollar.
The US rate outlook remains a key factor. The Federal Reserve kept interest rates unchanged at its latest policy meeting, with Fed Chair Jerome Powell stating that future rate hikes are unlikely unless inflation cools sufficiently. Current market expectations are for only 25-50 basis points of rate cuts within the year, contributing to continued volatility in Forex markets.
This week, the focus will be on the US labour report due on Friday, with other key employment data, including JOLTS Job Openings on Tuesday, ADP Non-Farm Employment Change on Wednesday, and Unemployment Claims on Thursday.
EUR
The EUR/USD pair traded sideways last week, fluctuating around the 1.085 level. This week, the market’s attention will be on the ECB interest rate decision on the 6th. The ECB is expected to cut interest rates, which has been priced in by markets. The big question is how the ECB will proceed with further cuts, given that inflationary pressures in the Eurozone are not easing as fast as anticipated. German CPI data and EU flash CPI showed higher-than-expected inflation, potentially complicating the ECB’s plans.
GBP
GBP/USD was volatile last week, ending near 1.274. The BOE kept interest rates steady at 5.25% but hinted at a dovish pivot. Inflation in the UK is not easing as quickly as expected, with headline inflation at 2.3% and core CPI at 3.9% in April. Markets are pricing in a BOE rate cut in September, with another cut by November fully priced in. The British economy narrowly avoided recession in February, showing slight growth.
JPY
USD/JPY edged higher last week, closing at 157.2. The BOJ kept all policy settings unchanged, despite the yen’s weakness. Inflation in Japan remains weak, with Tokyo Core CPI at 1.9% and headline inflation at 2.2% in April. Preliminary GDP data for Q1 showed that Japan’s economy shrank by 0.5%, increasing recession concerns and limiting the odds of a BOJ hawkish pivot.
Gold
Gold prices edged lower last week, ending close to $2,330 per ounce. The metal’s price movements were influenced by dollar volatility and geopolitical tensions. The Core PCE Price index data indicating easing US inflation provided some support for gold. However, diminishing expectations of Fed rate hikes and moderate odds of rate cuts put pressure on gold prices.
Oil
Oil prices were volatile last week, with WTI dropping below $77.0 per barrel after the OPEC meeting. OPEC+ decided to extend most voluntary production cuts into 2025 but announced plans to phase out these cuts gradually. US crude inventories fell short of expectations, and signs of diminishing oil demand in China further pressured prices.
Cryptocurrencies
Bitcoin and other major cryptocurrencies exhibited high volatility last week. Bitcoin surged above $70,000 early in the week but dropped below $68,000 over the weekend. Ethereum followed a similar pattern. Cryptocurrencies are influenced by central bank interest rates, with lower-than-expected US Core PCE Price Index data briefly boosting prices. However, crypto markets remain under pressure due to concerns over the Fed’s rate outlook and geopolitical tensions in Gaza.
Overall, the coming week will be closely watched for key economic data releases and central bank decisions, which are expected to drive market movements.
