Dollar Continues Winning Streak, GBP/USD Faces Limited Movement, and Australian Dollar Halts Winning Streak on USD Strength | Daily Market Analysis

Key events:

• UK - BoE Gov Bailey Speaks
• UK - BoE MPC Member Broadbent Speaks
• Canada - CPI (MoM) (Jan)

On Monday, the dollar made slight gains, extending its five-week rise fueled by robust inflation data, while the yen hovered around the psychologically significant 150 level. US markets remained closed for the Presidents' Day holiday, resulting in anticipated low trading volumes throughout the day. The dollar index, which measures the currency against six peers, edged up 0.13% to 104.35, following a 0.18% increase in the previous week. It reached its highest level since mid-November last Tuesday at 104.97 after January's US inflation exceeded expectations, prompting investors to adjust their expectations for the number of interest rate cuts by the Federal Reserve this year. However, it retreated on Thursday following reports of a decline in retail sales last month.

In thin Monday trading, EUR/USD returned to median prices, facing resistance below 1.0800. Later in the trading week, European and US Purchasing Managers Index (PMI) figures are expected, and investors await the latest Meeting Minutes from the US Federal Reserve’s Federal Open Market Committee. Markets, as indicated by the CME’s FedWatch Tool, currently anticipate a 75% chance of a Fed rate cut in June, influenced by higher-than-expected US inflation figures, leading to a shift in money markets expectations from the initially anticipated March rate cut.

The Canadian Dollar experiences a narrow trading range as the new week begins with reduced market activity. Canadian and US financial institutions are closed on Monday, with the majority of Canadians observing a day off. The Toronto Stock Exchange, a key component of Canada's financial sector, is closed. The US also observes Presidents’ Day, resuming trading activities on Tuesday. On Tuesday, Canada is set to release another Consumer Price Index (CPI) inflation print, and market participants eagerly anticipate Wednesday’s FOMC Meeting Minutes, seeking insights into the potential timing of a Federal Reserve interest rate cut.

GBP/USD experienced slight losses, reaching the 1.2597 level. The market exhibited limited movement, attributed to the absence of high-tier economic releases and the Presidents' Day holiday, sidelining US traders. Looking ahead to the remainder of the week, fresh market impetus is expected on Thursday with the release of the preliminary February Manufacturing and Services PMI surveys for both the UK and the US. Additionally, on Wednesday, the Federal Reserve is set to unveil the minutes from the January policy meeting. Currently, market sentiment delays the initiation of easing cycles by both the Fed and the Bank of England, citing insufficient evidence of decreasing inflationary pressures. The Fed’s minutes may explicitly reveal the bank officials' openness to initiating cuts, while the PMI reports will provide additional insights into the economic health of both regions. These releases have the potential to introduce volatility to the GBP/USD pair, influencing market bets and timing expectations for the commencement of cutting cycles by the Fed and BoE.

The four-day winning streak for the Australian Dollar comes to an end on Tuesday, driven by a strengthened US Dollar. Increased US Treasury yields contribute to the USD's strength, exerting downward pressure on the AUD/USD pair. Furthermore, a weaker performance in the Aussie money market adds to the bearish sentiment. The S&P/ASX 200 index also ceases its upward momentum, with declines in mining and energy stocks linked to softer commodity prices. Despite the release of the Reserve Bank of Australia's minutes from the February monetary policy meeting, the Australian Dollar remains relatively unaffected. During the meeting, the RBA Board deliberated on the possibility of a 25 basis points rate hike or maintaining the current status. Although recent data increased the board's confidence in inflation returning to the target within a reasonable timeframe, caution was expressed, stating that it would "take some time" before sufficient confidence in inflation could be attained. Consequently, the board decided it was prudent not to rule out the possibility of another rate hike.

In the early Asian trading hours on Tuesday, the USD/JPY pair maintains its position above the psychological mark of 150.00, experiencing a slight uptick due to renewed demand for the US Dollar. With inflation surpassing the 2% target for over a year, the Bank of Japan signals its intention to end the negative interest rate policy in the coming months. BoJ Governor Kazuo Ueda mentioned on Friday that the central bank would evaluate whether to sustain various easing measures, including the negative interest rate, once a sustained, stable achievement of the price target is on the horizon. Despite the upward movement in the USD/JPY pair, potential gains may be limited due to verbal intervention from Japanese authorities. Finance Minister Shunichi Suzuki expressed concerns about the negative aspects of a weak currency, emphasizing the need to balance the merits and demerits of a weak Yen.

Looking ahead, Japan's Trade Balance is scheduled for Wednesday, along with the FOMC Meeting Minutes and speeches from Fed's Bostic and Bowman. On Thursday, the preliminary Japanese Jibun Bank PMI for February will be released, capturing the market's attention.