Currencies: Dollar index lingers around 1-week low as central banks take center stage

December 14
16:04 2017

The dollar struggled for direction Thursday, as traders weighed a downbeat inflation outlook from the Federal Reserve up against what could come out of the European Central Bank and Bank of England decisions later in the day.

What are currencies doing?

The ICE U.S. Dollar Index DXY, +0.02%  was marginally higher at 93.468, struggling to recover from a 0.7% loss on Wednesday when the benchmark declined to a one-week low.

The pound GBPUSD, -0.0149%  rose to $ 1.3449 from $ 1.3419 late Wednesday in New York, trading around its highest level since Friday.

The euro EURUSD, -0.0676%  slipped to $ 1.1822 from $ 1.1827 on Wednesday.

The yen declined, with the greenback USDJPY, +0.19%  buying ¥112.79, rising from ¥112.54 recorded late Wednesday in New York.

The Swiss franc USDCHF, +0.3755% declined against all other major currencies after the country’s central bank kept its ultra-loose monetary policy in place, leaving the deposit rate at negative 0.75%. The franc dropped to $ 1.0126, down from $ 1.0149 on Wednesday.

The Norwegian krone NOKUSD, +0.9960%  soared after Norges Bank said that it expects to lift rates “somewhat earlier” than it had expected in September. A dollar fetched 8.2282 kroner, down from 8.3253 on Wednesday.

Read: The Game of Krones: Inside Denmark’s battle to defend its 35-year-old currency peg

What’s driving markets?

The dollar was still struggling to shake off weakness from Wednesday when the Fed, in a widely expected move, raised rates for the third time this year, but also suggested inflation will continue to be sluggish in 2018. Persistently weak inflation has been a major concern for the U.S. central bank as in indicates wages aren’t rising fast enough.

Read: Inflation outlook still baffles the Fed

The pound advanced ahead of the Bank of England’s decision on interest rates, due at noon London time, or 7 a.m. Eastern Time. But after raising rates for the first time in a decade in November, the BOE is widely expected to stand pat Thursday.

Read: What analysts are looking for in Thursday’s Bank of England meeting

Sterling investors also assessed the defeat for the government’s Brexit bill in a vote late Wednesday. The setback for British Prime Minister Theresa May is seen as potentially opening the way to a softer U.K. exit from the European Union.

Capping off a busy week in central bank news, the ECB is slated to announce its latest policy decision at 12:45 p.m. London time, or 7:45 a.m. Eastern Time. ECB President Mario Draghi will hold a press conference at 1:30 p.m. London time, or 8:30 a.m. Eastern.

Read: 3 things to watch for at Thursday’s ECB meeting

The ECB is also widely expected to stand pat, but traders will look for more signals on interest rates, staff projections for economic growth and inflation and whether the bank’s stimulus measures will be further tapered after September 2018. The central bank in October said it would halve its aggressive bond-buying program to €30 billion from €60 billion starting next month.

What are strategists saying?

“The outlook for the dollar has taken a hit over the past 24 hours and now seems to be at a near term crossroads and inflation could be the driver… The market could now question whether the Fed can tighten as the pace it is doing, and certainly not quicker,” said Richard Perry, analyst at Hantec Markets, in a note.

“This morning there is a degree of settling down and traders seem to be at a bit of a crossroads now. It will be interesting to see the reaction of the market as to whether this is seen as a minor blip in the dollar strength or something that becomes a problem for the dollar bulls. As ever the reaction on the bond yields will be telling,” he added.

What economic data are due?

A report on retail sales for November is due at 8:30 a.m. Eastern time, with import prices for the same month due at the same time. Economists polled by MarketWatch expect, on average, retail sales to rise 0.4%.

At 9:45 a.m. Eastern, the flash Markit manufacturing and services purchasing managers indexes for December will be released. Those will be followed by business inventories for October at 10 a.m. Eastern.

See MarketWatch’s Economic Calendar

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