Rate Hike Bets keep USD on Track for 3rd Weekly Gains, PCE in Focus

Rate Hike Bets keep USD on Track for 3rd Weekly Gains, PCE in Focus

The USD retreated slightly from its fresh peak in two months reached on Thursday, yet it is still set for the third weekly gain in a row due to increasing expectations for more rate hikes by the Federal Reserve.

Traders are watching closely the debt ceiling negotiation days before a potential government default. Meanwhile, economic data continue to offer more support for the greenback as the U.S. economy shows more signs of resilience. 

USD slightly lower ahead of PCE data

Although the USD experienced minor losses on Friday, it is still expected to have another weekly gain of 0.85% so far, marking its third consecutive weekly gain. This comes as traders are preparing for the possibility that U.S. interest rates may stay high for longer than previously anticipated.

The US Dollar Index (DXY) is down by 0.2%, steadying just above 104.

This week, the dollar’s status as a safe haven has contributed to its rise above the 104 mark for the first time since March. The failure to reach an agreement to increase the U.S. government’s $31.4 trillion debt ceiling to avoid default by early June, is causing a risk-off mode pushing investors towards the safe haven USD. 

If the U.S. defaults, it would have a negative impact on the global economy. Therefore, traders are refraining from investing in high-risk currencies.

According to a Reuters report released on Thursday, it seems that the two sides are nearing a deal. However, it is important to note that for any agreement to be finalized, it must be approved by both the House of Representatives and the Senate.

Later on Friday, the Personal Consumption Expenditures (PCE) index will be released. This index is the Fed’s preferred gauge for inflation and will be closely monitored as traders are pricing in another 25bps rate hike in June meeting.

The PCE index is expected to slow down from 4.2% to 3.9% annually, while accelerating on a monthly basis to 0.4% in April, from 0.1% previously. The core index, which excludes volatile food and energy prices, is seen stabilizing at 0.3% monthly and 4.6% annually.

Due to persistent inflation, it is expected that the Fed may need to deliver more rate hikes. However, futures markets show a split,between rate hike and a pause.

Recent indicators suggest that the US economy is still strong, despite the Federal Reserve’s efforts to increase interest rates. This makes it unlikely that U.S. interest rates will be cut this year.

The US GDP growth for the first quarter has been revised higher, and the weekly number of jobless claims has slightly risen, but not as much as anticipated.

Data released on Thursday showed that the number of Americans filing new claims for unemployment benefits increased only moderately last week to 229,000, while first-quarter GDP growth was revised higher to 1.3%, from 1.1%.

The recent FOMC minutes revealed that some members want to raise rates more, while others think that slower growth reduces the need for further tightening.

EUR/USD rose 0.15% to 1.0734, but still hovering near its two-months low. Markets are still expecting the European Central Bank to continue raising interest rates this year, despite the economic slowdown. Data released yesterday showed that Germany, the largest european economy, has fell into a technical recession as GDP contracted for two consecutive quarters.

Klaas Knot, the head of the Dutch Central Bank, recently stated that the ECB should carry out two more interest rate increases of 25 basis points each.

The GBP/USD remained below the $1.24 level on Friday, sticking to its lowest levels since March. The UK economy is experiencing consistent inflationary pressures as per the latest inflation data. This supports the argument for the Bank of England to increase interest rates again.

The annual inflation rate dropped to 8.7%, which is the lowest it has been in a year. However, it was still higher than the market’s predicted rate of 8.2%. The core inflation rate, which does not take into account food and energy prices, increased significantly to 6.8%, marking its highest level in 31 years.

Furthermore, the rate of food inflation stayed close to a 45-year peak of 19%.

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