On Monday, risk sentiment increased as a result of China reopening its borders and rising expectations that the Federal Reserve may lower the rate at which it raises interest rates.
After surging 1.5% on Friday, the sterling was back on the move on Monday, rising 0.42% to $1.2143. After finishing 1.17% higher on Friday, the euro gained 0.28% at $1.0674.
While there were more indications of an economy slowing down, including the services industry activity shrinking in December for the first ever time in more than 2-1/2 years, U.S. data indicated a rise in the workforce and moderating wage growth.
Moh Siong Sim, a currency strategist at the Bank of Singapore, believed data on Friday provided the market with some hope that possibly the U.S. is taking a step back and the Fed does not require to do much more.
However, it’s still unclear whether a gentle landing is indeed in the cards.
Analysts have noted that Fed officials are expected to be concerned about the persistently tight labour market and will continue to lean hawkish.
Sim noted that while there have been softening earnings and inflation recently, the job market is still a little bit too hot.
The probability of a half-point rise in the fed funds rate is currently around 25%, down from over 50% a month ago.
After four straight 75 basis point rate increases last year, the U.S. central bank increased interest rates by 50 bps – or basis points last month.
However, it stated that it was likely to keep rates higher for longer in order to control inflation.
After falling 1.15% on Friday as investors shifted to riskier assets, the dollar index, which compares the value of the dollar against six main currencies, dropped 0.145% to 103.570 on Monday.
Reopening its borders and relaxing much of its strict “zero-COVID” policy, which allowed travellers to enter the nation via air, land, and sea, also helped to improve mood.
On Monday, the Chinese yuan rose against the dollar to a nearly five-month high on hopes for a quick economic recovery.
The kiwi soared 0.68% to $0.639, the best level in three weeks, while the trade- and China-sensitive Australian dollar increased 0.80% to $0.693, its highest level since August 30.
After followers of far-right ex-President Jair Bolsonaro invaded the country’s Congress, presidential mansion, and Supreme Court, they were detained but the Brazilian real had yet to trade elsewhere.
Investors will pay close attention to the consumer price index figures due on Thursday and a presentation by Fed Chair Jerome Powell this week to look for indications on the central bank’s next move because the next Fed meeting is set to begin at the beginning of next month.
Citi stated that while it anticipates a subsequent “softer” core CPI print with a certain upside potential, core inflation may rise up in early 2023.
Since there are still significant underlying inflationary expectations and further relaxing of financial conditions would probably not be a desirable consequence, it is anticipated that the Fed will increase interest rates by fifty basis points in February.
Japanese yen gained 0.37% to a trademark 131.59 each dollar.
The Asian currency will continue to depreciate this year, according to Amir Anvarzadeh, a market strategist at the Asymmetric Advisors, as mounting inflationary pressures in Japan would push policymakers to further adjust their yield curve control and finally shift away from the quantitative stimulus.
There are also worries that this year might be similar, if not worse than 2022 when it comes to how the blunt impact fell on the markets during the doubt of the recession. Nonetheless, the financial sector braces itself for any foreseeable battle.