Dollar speculators focus on personal income and spending data

As traders attempt to gauge the likely path the Federal Reserve is likely to take in tightening policy in the new year, the US dollar slipped lower during early European trade Friday, handing back some of the previous session's gains. The Dollar Index, a measure of how the greenback compares with a basket of six other currencies, fell by 0.2% to 103.877 in early trade on Friday.

The dollar rose strongly on Thursday after data showed that the U.S. labour market remains tight and that the country's economy has rebounded from its recession in the first half of the year at a faster pace than previously anticipated, as well as the second-quarter data showed that the economy had contracted.

Taking these numbers into account, it appears that in order for the Federal Reserve to have a serious chance of controlling inflation in the near future, it will have to continue its aggressive policy-tightening path for longer than previously anticipated.

In any case, sentiment has changed overnight to the detriment of the greenback, with traders noting that the data points to a resilient economy that contributed to the drop in the greenback.

Several economic data releases are also scheduled for Friday, including data on personal income and spending, which are expected to be closely watched since the last two reports of the consumer price index indicate that price pressures have cooled, giving rise to the belief that inflation may have reached its peak. The DXY will likely end the year at its current levels. As expected, December has been one of the weakest months for the dollar in the past four years. However, it is worth remembering that the dollar has risen in each of the past four years in January. In our view, the dollar will recover early in 2023.

In the meantime, EUR/USD rose 0.3% to 1.0628, following the announcement that French producer prices were up 1.2% in November, significantly higher than the 0.2% fall seen in the prior month, indicating inflation will be a difficult nut to crack in the eurozone.

According to Vice-President Luis de Guindos, in an interview with the Le Monde newspaper published on Thursday, the ECB is considering raising interest rates at its current pace for an extended period of time to curb inflation.

In his words, "In the near term, increases of 50 basis points are likely to become the new norm. We do not have a choice but to act.”

USD/JPY rose by 0.2% to 132.52, as the yen gave back some of the gains it had made this week due to the BOJ making the decision to allow 10-year bond yields to move in a wider range.

According to data released Friday, Japanese consumer prices excluding fresh food increased 3.7% in November compared to a year ago, marking the fastest pace of increase in consumer prices since 1981, an outcome that could indicate that the Bank of Japan will make further changes to its policy in January.