The dollar index gained 0.42% to 103.03, and moved away from the eight-month low of 102.15 hit last week, while the euro dropped 0.36% versus the dollar at $1.0973
The dollar held gains against the euro on Thursday, pulling the common currency back from a seven-month high, after U.S. economic data eased fears of a recession risk and dampened expectations for interest-rate cuts.
U.S. retail sales increased more than expected in July, a sign that demand is not declining and which could prompt financial markets to pare back expectations for a 50 basis point rate cut next month.
In addition, fewer Americans than expected filed for unemployment benefits in the latest week, suggesting an orderly labour market slowdown remained in place, although laid-off workers are finding it a bit difficult to land new jobs.
The euro dropped 0.36% versus the dollar at $1.0973. It hit $1.10475, its highest level this year, on Wednesday, as markets digested U.S. inflation figures.
The dollar index gained 0.42% to 103.03, and moved away from the eight-month low of 102.15 hit last week.
The data this morning goes counter to the recent market narrative of a Fed that is drastically behind the curve and would have to deliver jumbo rate cuts to avert a recession, according to Peter Vassallo, FX portfolio manager at BNP Paribas Asset Management. Market pricing has adjusted accordingly, and short-term U.S. rates have increased significantly on the day.
The pound was 0.17% higher at $1.2849, as data showed Britain’s economy expanded 0.6% in the second quarter, in line with economists’ expectations and building on a quick 0.7% recovery in the first quarter of the year.
The pound also firmed on the euro, which slipped 0.53% to 85.38 pence.
Thursday’s U.S. data follow Wednesday’s release of the CPI, which increased moderately in July, in line with expectations, and the annual rise in inflation slowed to below 3% for the first time since early 2021.
The figures add to the mild rise in producer prices in July in suggesting that inflation is on a downward trend, although traders now think the Federal Reserve will not be as aggressive on rate cuts as they had hoped.
This morning’s data absolutely crushed remaining bets on a half percentage-point move at the Fed’s September meeting, said Karl Schamotta, chief market strategist at Corpay.
Fear of a ‘hard landing’ in the U.S. economy has been almost fully unwound, he added, and Fed officials are seen responding with a more cautious start to the easing cycle.
Markets are now pricing in a 74.5% probability of a 25 basis points cut next month and a 25.5% probability of a 50 basis points cut, according to the CME FedWatch tool. Traders were evenly split at the start of the week between the two cut options following last week’s sell-off.
