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The dollar is on track for its biggest weekly decline against the euro in two and a half months, as signs of cooling U.S. inflation and a softening economy have raised the likelihood of upcoming rate cuts by the Federal Reserve.
Euro Gains on Dollar Weakness
The euro has surged 0.9% against the dollar this week, breaking past resistance around $1.0855 and reaching as high as $1.0895 following a slowdown in U.S. inflation. It was last trading at $1.0861.
April’s annual U.S. inflation figures met expectations but were lower than the previous month, bolstering confidence that the Federal Reserve might cut interest rates in September and December. This has fueled rallies in stocks and bonds while putting pressure on the dollar. Additionally, U.S. retail sales were flat in April and below expectations, with manufacturing output also unexpectedly declining.
“Alongside inflation, a lot of activity data has been cooling off,” said Westpac strategist Imre Speizer, attributing the dollar’s weakness to these economic signals.
European Data Shows Strength
Despite markets anticipating European rate cuts starting in June, recent data has offered some positive surprises. Germany’s economy grew more than expected in the last quarter, and investor morale is at a two-year high.
Commodity Currencies Strengthen
The Australian and New Zealand dollars have also strengthened significantly against the U.S. dollar this week, with the Aussie up more than 1% and the kiwi up 1.7%, marking its best week of the year.
- Australian Dollar (AUD): At $0.6675, the Aussie slipped from a four-month high after a surprise rise in unemployment figures reduced the likelihood of another rate hike.
- New Zealand Dollar (NZD): The kiwi held steady at $0.6120, with traders focusing on next week’s central bank meeting, where the official cash rate is expected to remain at 5.5%.
Sterling and Yen Performance
- British Pound (GBP): Sterling has gained 1.1% this week, reaching $1.2664.
- Japanese Yen (JPY): The yen has been broadly steady at 155.48 per dollar.
Cryptocurrency Markets
In the cryptocurrency market, Bitcoin has risen 6.6% this week, trading at $65,343.
Upcoming Data
Traders are now looking forward to Chinese retail sales and industrial output data, as well as the final European CPI numbers, which are set to be published later on Friday.
The dollar’s significant decline against the euro and other currencies this week reflects growing expectations of U.S. interest rate cuts amid softer inflation and economic data. Meanwhile, stronger-than-expected economic performance in Europe and resilience in commodity currencies have further influenced the forex landscape. As investors continue to navigate these dynamics, upcoming economic releases from China and Europe will be closely watched for further insights.
