Anna 
The US Dollar (USD) experienced a modest weekly retracement, reversing gains and retreating from yearly peaks near 106.50 observed earlier in the month, as investors reacted to shifting expectations regarding the Federal Reserve’s (Fed) monetary policy.
Investor sentiment towards the timing of the Fed’s easing program has fluctuated, with the likelihood of a rate adjustment at the September 18 meeting losing momentum. This shift is influenced by persistently high US inflation figures, evident in both the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) data for March.
The unexpected slowdown in deflationary pressures, coupled with a tight labor market, underscores the economy’s strength and suggests a prolonged period of tighter monetary policies by the Fed. Market indicators, such as the CME Group’s FedWatch Tool, reflect reduced expectations for a Fed easing cycle in September, currently estimated at around 45%.
US Dollar performance last week aligned with stabilization in US yields near multi-month highs, against a backdrop of diminishing expectations for interest rate cuts throughout the remainder of the year.
Although the Fed is currently in a blackout period, recent comments from Fed officials highlight a consensus on maintaining the current restrictive stance. Atlanta Federal Reserve Bank President Raphael Bostic hinted at potential moves by year-end, while New York Fed’s John Williams emphasized data-driven rate adjustments. FOMC Governor Michelle Bowman expressed uncertainty regarding the adequacy of interest rates in addressing inflation concerns, echoing Chairman Jerome Powell’s cautious approach to initiating rate cuts.
Looking ahead, interest rate trajectories among G10 central banks and inflation dynamics point towards potential rate cuts by the European Central Bank (ECB) during the summer, possibly followed by the Bank of England (BoE). Conversely, the Federal Reserve and the Reserve Bank of Australia (RBA) are anticipated to initiate easing later this year, potentially in the fourth quarter. The Bank of Japan (BoJ), despite recent policy rate hikes, remains an outlier in the global interest rate landscape.
