Euro Edges Down as Euro Zone Avoids Recession and Dollar Rises Ahead of Fed Decision
Euro and Dollar’s Performance
The euro slightly decreased on Tuesday following the release of data indicating that the euro zone narrowly evaded a technical recession in the fourth quarter. Meanwhile, the U.S. dollar saw a slight rise as traders eagerly anticipated the Federal Reserve’s monetary policy decision later in the week.
Euro Zone GDP
The gross domestic product (GDP) in the euro zone remained unchanged in the fourth quarter compared to the previous three months. This was primarily driven by strong growth in Spain and Portugal, as well as a modest increase in Italy. However, the German economy experienced a contraction in the final quarter of 2023.
Impact on Euro-Dollar Exchange Rate
As a result of the stronger U.S. economic outlook compared to the euro zone, the euro declined by 0.05% against the dollar, with investors fully pricing in an anticipated rate cut by the European Central Bank (ECB) in April.
Market Analyst’s Perspective
Market analysts have noted that the pressure on the ECB has been somewhat alleviated by the latest GDP figures, but concerns remain. The euro has experienced a 2% decline in January, with risks continuing to weigh down the currency as long as rate-cut expectations persist among investors.
Focus on U.S. Data and Federal Reserve
With the Federal Reserve expected to maintain interest rates, all eyes are on the tone that Fed Chair Jerome Powell will set at the upcoming press conference. Market participants are eager for any hints of potential rate cuts in the near future.
Market Expectations
Current market expectations suggest a 46.6% chance of the U.S. central bank initiating rate cuts in March, a decrease from 73.4% a month ago. This shift is attributed to reinforcing data indicating the resilience of the U.S. economy.
Upcoming U.S. Job Openings Report
The upcoming U.S. job openings report will offer insight into the state of the domestic job market, setting the stage for the highly anticipated January U.S. payrolls report later in the week.
Performance of Other Currencies
Amidst these developments, sterling slid ahead of the Bank of England’s monetary policy meeting, while the U.S. currency also experienced fluctuations against the yen.
Analysis of Japanese Policy
With Japanese policy normalisation potentially on the horizon, the dollar-yen rate is expected to be more influenced by the Fed than by any expectations of a policy shift by the Bank of Japan in the short term.
Japanese Jobless Rate
Government data revealed that Japan’s jobless rate fell to 2.4% in December, slightly below economists’ median forecast of 2.5% in a Reuters poll.
