Wage data dents dollar recovery before Fed rate decision
Adds data, dollar monthly performance; updates prices
By Karen Brettell
NEW YORK, Jan 31 (Reuters) -The dollar fell on Tuesday, giving up earlier gains, after data showed U.S. labor costs increased less than expected in the fourth quarter, and before the Federal Reserve is expected to hike rates by 25 basis points on Wednesday.
The Employment Cost Index, the broadest measure of labor costs, rose 1.0% last quarter. That was the smallest advance since the fourth quarter of 2021 and followed a 1.2% gain in the July-September period.
Still, it is not seen as likely to sway the U.S. central bank from some further rate hikes.
“Despite the fact that it came in below expectations, objectively speaking it’s still a pretty firm print that means that the Fed is still going to sound hawkish,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto.
Other data on Tuesday also showed that house price growth slowed considerably in November, with a 9.2% increase in the month.
Fed funds futures traders are pricing for the Fed’s benchmark rate to peak at 4.91% in June, up from 4.33% now. FEDWATCH
But investors are also bearish on the U.S. economy and see the Fed as having to cut rates back to 4.48% by December. This is despite Fed officials stressing they will need to keep rates in restrictive territory for a period of time in order to bring down inflation.
“(Fed Chair Jerome) Powell and the FOMC will want to flag the fact that we are going to see higher rates for a little bit longer. It’s all about whether or not the market believes that narrative at this point,” said Rai.
The dollar index =USD was last down 0.21% on the day against a basket of currencies at 102.03. It earlier rose to a two-week high of 102.61, which analysts said was likely due in part to repositioning for month-end.
The greenback is also trading just above key technical supports against major currencies including the euro.
The index is on track to post a monthly loss of 1.39% for January, after losing 2.26% in December and 5.07% in November, which was its worst monthly loss since September 2010. The losses in November came on expectations that the Fed would begin slowing rate hikes, which it did in December.
The index has weakened from a 20-year high of 114.78 on Sept. 28.
The euro EUR=EBS gained 0.21% on the day to $1.0867, after earlier falling to $1.0802.
Data on Tuesday showed the euro zone eked out growth in the final three months of 2022, managing to avoid a recession even as sky-high energy costs, waning confidence and rising interest rates took a toll on the economy that is likely to persist into this year.
The European Central Bank and Bank of England are both expected to hike rates by 50 basis points on Thursday.
Sterling GBP=D3 fell 0.16% against the dollar to $1.2329.
The dollar fell 0.24% against the Japanese yen JPY=EBS to 130.12.
World FX rateshttps://tmsnrt.rs/2RBWI5E
Additional reporting by Harry Robertson in London
Editing by Mark Potter and Mark Heinrich
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.