Central Banks to Shape Dollar's Direction This Week

The dollar takes centre stage as it claws back from an eight-month low, exhibiting a resilient spirit ahead of a decisive week of central bank meetings. The U.S. dollar index, which showcases the strength of the greenback against a basket of currencies, rises with a modest 0.03% increase to reach 101.92, an indication of the dollar's regained vigour after hitting an eight-month low at 101.50 last week.

As the markets brace themselves for policy decisions from the Federal Reserve, European Central Bank, and the Bank of England, the greenback's gains are limited by a dovish repricing of the Fed's rate hike expectations in comparison to its more hawkish peers. The U.S. dollar is on track for its fourth consecutive monthly loss of more than 1.5%, a result of the growing belief that the Fed's rate hike cycle is reaching its end, and interest rates will not have to rise as high as previously anticipated.

While the movement remains subdued, the sterling rises with a 0.04% increase to reach $1.2405, while the euro rises with a 0.06% increase to $1.0874, providing a glimpse of the fluctuating landscape that lies ahead. With central bank meetings around the corner, the world's eyes will be fixed on the dollar as it takes its first steps towards reclaiming its throne.

Fed Reserve: Slow and Steady?

As the Federal Reserve meets on Wednesday, investors will be eyeing a possible 25-basis point rate hike to a range of 4.5% to 4.75%, marking the second consecutive meeting of a slower pace of interest rate hikes. The Fed Chair, Jerome Powell, will hold a press conference following the meeting, where market watchers will look for clues on the future trajectory of rates.

Jobs Report in the Spotlight

The U.S. employment report on Friday is expected to show 185,000 jobs created in January, a slowdown from 223,000 the previous month. The unemployment rate is projected to tick up to 3.6%, while average hourly earnings are expected to slow slightly. The week's economic calendar also features a report on job openings for December and ISM PMIs.

ECB: Hawkish Lagarde

The ECB is expected to hike rates by 50 basis points to 3% when it meets on Thursday. Despite growing dissent among policymakers, ECB President Christine Lagarde is expected to remain hawkish as core inflation remains stubbornly high. Policy hawks are pushing for another hike in March, as inflation is still well above the ECB's 2% target. The Eurozone will release the fourth quarter GDP and inflation data for January before the ECB meeting.

BOE: Hiking Since 2021

The BOE, the first major central bank to begin hiking rates, is expected to deliver its tenth-rate hike since December 2021 on Thursday. Rates are expected to rise by 50 basis points to 4%, as headline inflation moderated to 10.5% in December, although it remains over five times the Bank's official target, and wage growth remains persistently high. Market watchers will be on the lookout for signals at the end of the tightening cycle.

Chinese Markets Reopen

After the week-long Lunar New Year holidays, Chinese financial markets return to pick up where they left off, at a five-month peak for mainland blue chips. Holiday travel inside China surged 74%, according to state media, while COVID deaths have dropped 80% from their peak. Tuesday's PMI data is expected to show some impact of China's reopening, with the service sector rebounding into expansion territory and the manufacturing sector remaining in contraction due to the timing of the New Year holiday.