The spotlight will be firmly on the February jobs report scheduled for Friday and Powell’s testimony to Congress on Tuesday and Wednesday
The dollar index, which measures the performance of the U.S. currency against six others, was last flat on the day at 104.63, having lifted off a session low of 104.34. The index clocked a weekly loss for the first time since January, last week.
After delivering jumbo hikes last year, the Fed has raised interest rates by 25 basis points at its last two meetings. But a slew of resilient economic data has fed a belief among investors that the central bank might have to switch back to half-point rises.
Futures imply a 76% chance the Fed will raise interest rates by 25 basis points at its meeting on March 22, with a 24% chance of a 50 bps increase.
The spotlight will be firmly on the February jobs report scheduled for Friday and Powell’s testimony to Congress on Tuesday and Wednesday.
“Of all this week’s events, it will be payrolls that will be the most important one,” Rabobank currency strategist Jane Foley said.
“Are we going to have a continuation of the February outlook of higher for longer or are the markets going to come back to January payrolls is going to be a bit of an outlier and maybe the economy is slowing,” she said.
In early February, the January monthly employment report showed blisteringly fast job growth and sustained wage inflation, which was enough – together with strong reads of consumer spending and business activity later in the month – to convince investors that the U.S. central bank won’t have any reason to cut rates this year.
The dollar has risen by around 2% since then, largely at the expense of the Japanese yen, which has lost over 5% in value against the U.S. currency in that time.
The euro, which has lost around 3% against the dollar since early February, was last flat on the day at $1.0635, while sterling was down 0.4% at $1.200.
Weekly futures data on Friday showed money managers are holding the largest bullish euro position in over two years, which drove the currency to nine-month highs in February. But now that’s leaving it looking vulnerable to a steep sell-off, especially if investors’ outlook for U.S. rates does not shift and euro zone economic data doesn’t show a material improvement.
“At this stage, people probably extended those positions assuming a recovery story and what they’re getting instead is a technical recession followed by some resilience and that’s not good enough,” Rabobank’s Foley said.
Powell’s remarks, meanwhile, will be under scrutiny too.
“He may provide clues as to what employment and inflation numbers need to do to make the Fed act in a particular way, especially how it pertains to whether 50-bp hikes are back on the table,” Deutsche Bank strategist Jim Reid said.
The yen was last down 0.24% on the day at 136.15 per dollar, ahead of the final policy meeting on Friday for Bank of Japan Governor Haruhiko Kuroda.
Elsewhere, China’s yuan fell against the dollar, after Beijing set a modest target for 2023 economic growth of around 5%. The offshore yuan fell as much as 0.8% to 6.949 per dollar, while the Australian dollar, often traded as a liquid proxy for the yuan, fell 0.7% to $0.672
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