The US dollar weakened on Monday but remained near a three-week high ahead of the Federal Reserve’s final policy meeting of the year, while the euro dropped following regional economic data.
At 05:35 ET (10:35 GMT), the Dollar Index, which measures the dollar against a basket of six other currencies, was down 0.1% at 106.580, having reached a three-week peak on Friday.
Dollar retreats from recent gains
The dollar has given up some of its recent gains as traders adjust their positions ahead of the Federal Reserve’s anticipated interest rate cut on Wednesday. The central bank is widely expected to lower its target policy range by 25 basis points to 4.25-4.50%.
“Focus will shift to how the Fed explains its decision to skip the January meeting. The new Fed forecasts are also expected to revise the number of anticipated rate cuts in 2025, reducing it to three from four. While this is already priced in, there’s little reason for the Fed to surprise the market with a dovish stance this week, so we expect the dollar to remain supported,” analysts at ING noted.
Euro drops after PMI data
In Europe, the euro slipped slightly to 1.0499 against the dollar following the release of data indicating a slowdown in eurozone business activity this month, though there were signs of economic progress.
The preliminary composite Purchasing Managers’ Index (PMI) for the eurozone, compiled by S&P Global, rose to 49.5 in December from 48.3 in November, but remained below the 50 mark, which separates growth from contraction.
The region’s services sector showed a recovery, offsetting the ongoing contraction in the manufacturing sector.A number of European Central Bank officials are scheduled to speak this session, following the central bank’s recent interest rate cut, including ECB President Christine Lagarde, Pierre Wunsch, and Isabel Schnabel.
“The latter two are considered more hawkish, and there could be upward pressure on EUR/USD if they push back against expectations of below-neutral monetary policy rates,” ING noted.
GBP/USD rose 0.3% to 1.2652, recovering from last week’s losses after data revealed a surprising contraction in the UK economy in October.
The Bank of England’s latest policy meeting is set for Thursday, with a 25 basis point rate cut expected, despite its gradual approach to easing.
Yuan struggles with economic weakness
In Asia, USD/CNY climbed 0.2% to 7.2899, staying near a two-year high following the release of more disappointing economic data.
China’s industrial production met expectations in November, supported by recent stimulus measures from Beijing. However, home prices showed a slight decline, marking the slowest drop in 17 months, and retail sales for November were much weaker than anticipated, indicating ongoing weakness in consumer spending despite policy support.
USD/JPY rose 0.1% to 153.70, as Reuters reported that the Bank of Japan is likely to keep interest rates steady this week, contrary to earlier expectations for a rate hike.
