The dollar rose on Monday as bets increased. Inflation in the United States will bolster the case for higher interest rates, while the European Central Bank’s dovish stance on rising prices will weigh on the euro.
The dollar sold late last week after a weaker-than-expected headline job-creation figure in the United States forced traders to exit long dollar positions.
However, analysts believe that better-than-expected unemployment figures and US inflation figures, which expect to show headline CPI at a red-hot 7% year on year on Wednesday, make a strong case for interest rates to rise sooner rather than later.
Due to the early additional price pressure, the Fed is likely to feel compelled to begin the hiking cycle as soon as the March meeting.
According to the CME’s FedWatch tool, traders have priced in a rate hike in March at a rate of more than 90%, and investors will be looking for cues from Federal Reserve chair Jerome Powell and governor Lael Brainard. They will testify before Senate committees this week.
In early European trading, the dollar index, which measures the value of the US currency against a basket of major currencies, was up 0.18 percent at 95.964.
The dollar rose 0.1 percent against the yen to 115.66, close to last week’s five-year high of 116.35, despite a holiday in Japan.
The euro was down 0.3 percent against the dollar, trading at $1.1327.
Despite data showing euro zone inflation jumped to 5% in December, investors believe the ECB is still far behind the Fed in the tightening cycle.
However, comments made by an ECB policymaker on Saturday raised concerns about the central bank’s ability to change its stance in the future.
This morning, euro-watchers are deciphering Isabel Schnabel’s weekend speech, which suggests that the energy transition will pressure inflation and may cause the ECB’s inflation forecasts to be revised higher.
For the time being, however, the clear and present danger of tighter policy emanates from the United States, they believe, adding that they currently anticipate the ECB tightening in March 2023. The sterling was slightly weaker against the dollar, down 0.05 percent at $1.3591, but has been rallying on expectations that the Bank of England (BOE) will hike in tandem with the Fed.
The Australian dollar wiggled around $0.7195, aided by a rise in Australian bond yields.
Cryptocurrencies were under pressure at the start of the year due to widespread selling in risk assets but were steady in Asia after bitcoin managed to hold support at $40,000 through weekend trade. Bitcoin was last worth $41,783, and ether was worth $3,173.
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