On Wednesday, the U.S. dollar surged as investors prepared for upcoming U.S. and European inflation reports scheduled for Thursday. In contrast, the Australian and New Zealand dollars experienced a sharp decline following the New Zealand central bank’s decision to lower its forecast peak for interest rates and the revelation that Australian consumer price inflation remained at a two-year low.
Market sentiment was also influenced by month-end portfolio rebalancing, which typically impacts market direction and can lead to increased volatility. Brad Bechtel, the global head of FX at Jefferies in New York, noted that volatility picked up on Wednesday, possibly due to hedging activities ahead of the inflation data releases from the United States and the European Union. Additionally, month-end flows contributed to the heightened volatility.
The implied volatility, a measure used by banks to price three-month options on the euro against the dollar, reached 6.01 on Wednesday, marking its highest level since February 15. Although it subsequently decreased to 5.78, volatility in major currency pairs has been on a downward trend, with the euro/dollar measure hitting its lowest point since January 2022 on Tuesday.
Traders are closely monitoring economic data for insights into the potential timing of interest rate adjustments by the U.S. Federal Reserve. Recent expectations suggest that the Fed may postpone rate cuts until June, as strong economic growth, persistent inflationary pressures, and increasingly hawkish rhetoric from Fed officials have influenced market sentiment.
On Thursday, investors are anticipating the release of the U.S. Personal Consumption Expenditures data, with expectations of a 0.3% rise in headline prices for January, resulting in an annual gain of 2.4%. The core index, which excludes volatile food and energy prices, is forecasted to increase by 0.4% for the month and 2.8% on a yearly basis.
In addition to U.S. data, consumer price reports for Germany, France, and Spain are also scheduled for release on Thursday, ahead of the euro area figures set for Friday.
Mohamad Al-Saraf, an FX and rates strategist at Danske Bank, noted the possibility of ongoing disinflation in the euro area, which could prompt the European Central Bank to consider earlier rate cuts. Al-Saraf suggested that if inflation remains more persistent in the U.S. compared to the euro area, it could strengthen the dollar.
The dollar index, a measure of the greenback’s performance against a basket of major currencies, rose by 0.18% to 104.02. Meanwhile, the euro experienced a slight dip of 0.18% against the dollar, reaching $1.0826.
Furthermore, the Japanese yen continued to weaken against the dollar, nearing the 150.88 level recorded on February 13, which marked its lowest point since November 16.
The strength of the dollar against the yen indicates carry trades and reflects a “risk-on,” high-liquidity environment that is currently influencing foreign exchange markets, according to Brad Bechtel, global head of FX at Jefferies. The dollar rose by 0.17% against the yen to reach 150.75.
Meanwhile, the New Zealand dollar experienced a significant drop of 1.28% to $0.06090 following the Reserve Bank of New Zealand’s decision to keep rates steady, which was in line with expectations but defied some market bets for a rate hike. The RBNZ’s rate forecast track and commentary were also perceived as slightly more dovish than anticipated by some traders.
Similarly, the Australian dollar fell by 0.76% to $0.6493 after Australia’s consumer price inflation data for January came in below forecasts, reinforcing expectations that interest rates are unlikely to rise further.
In the cryptocurrency market, Bitcoin surged past $60,000 for the first time in two years, propelled by the launch of new U.S. spot bitcoin exchange-traded products. Bitcoin recorded a gain of 7.03% for the day, reaching $60,711.