USD Dips Ahead of Powell Speech, US Inflation Data

January 10, 2023 11:03

The USD dipped against the EUR ahead of Federal Reserve Chairman Jerome Powell’s speech later today. Will the currency continue last year’s story of strength or is there a new theme of dollar weakness in the air?

The US Dollar’s strength was a long-running theme in 2022, affecting the affordability of commodities like crude oil and gold while attracting investment in USD-linked assets like Treasuries. As the Federal Reserve began pulling back on the size of its interest rate hikes at the end of the year, recession fears started to drag on the currency. Sentiment towards the USD might have been encouraged by better-than-expected US jobs data last week, but headwinds of uncertainty are still buffeting the currency.

To begin with, there are weaknesses in the US’s key economic sectors such as manufacturing, which contracted for a second consecutive month in December. Another factor is inflation. Consumer and raw material prices might have declined towards the end of last year, but businesses and households now have high borrowing and loan repayment costs to handle.

US inflation rate

The latest reading on US inflation rates will be released on Thursday. Previously at the level of 6 percent, core inflation for December is seen at 5.7 percent on an annual basis. Headline inflation for December is seen falling from 7.1 percent to 6.5 percent on an annual basis. On a monthly basis, core inflation is seen at 0.3 percent in December versus 0.2 percent in November.

Core inflation is a key metric for the Federal Reserve, and if the latest benchmark is in line with expectations, it would be a welcome trend in terms of price stability. On the other hand, if the results disappoint and are higher than expected, the central bank might reinvigorate its hawkish stance.

In this scenario, the USD would likely sustain its strength against other currencies like the EUR which is hampered by growth fears amid the war in Ukraine.

Germany Gross Domestic Product (GDP)

Often nicknamed the engine of Europe’s economy, Germany accounts for an estimated 25 percent of the EU’s GDP. The country is due to release its full-year GDP growth rate for 2022 on Friday and the benchmark report might support or undermine the EUR depending on the results. Previously at the level of 2.6 percent, GDP is seen at 1.8 percent on an annual basis.

If the results are in line with expectations, it might support the EUR but if expectations are disappointed, there could be an impact on the EUR currency pairs.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Sarah Fenwick
Sarah Fenwick Financial Writer, Admirals London

Sarah Fenwick's background is in journalism and mass communications. She has worked as a correspondent covering Swiss Stock Exchange news and written about finance and economics for 15 years.