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Rate Cut Outlook Drove Dollar's Moves Last Week

Monetary policy expectations from the Federal Reserve predominantly drove the Dollar’s movements during the week spanning May 6 to May 10. Amidst hawkish Fed commentary and weak labor market updates, the U.S. Dollar gained against the British pound, the Australian Dollar as well as the Japanese yen but declined against the euro. The 6-currency Dollar Index also gained during the week.

The Dollar Index or DXY, which measures the Dollar’s strength against a basket of 6 currencies increased 0.22 percent during the week ended May 10. The Index closed at 105.31 on Friday versus 105.08 a week earlier. The week’s low of 104.87 was recorded on Monday whereas the week’s high of 105.74 was touched on Thursday.

The Dollar attempted a rebound at the onset of the week amidst an increasing number of Fed officials vouching for interest rates to stay higher for longer. The dollar had plunged massively in the previous week ended May 3 after a weaker-than-expected job market update renewed hopes of a rate cut by the Fed. However, the rebound was short-lived as fresh data showed a spurt in jobless claims.

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Data released by the U.S. Department of Labor on Thursday showed the number of people claiming unemployment benefits in the U.S. surged to 231 thousand in the week ending May 4 versus 209 thousand in the previous week. The highest reading since August of 2023 was sharply above market expectations of 210 thousand.

The euro’s move from $1.0758 on May 3 to $1.0769 on May 10 helped the EUR/USD pair to record gains of 0.10 percent during the past week. Though the pair had descended from the high of 1.0791 recorded on Monday to a low of 1.0724 by Thursday, it eventually closed higher on Friday at 1.0769. The rebound came as markets reassessed the Fed’s monetary policy outlook in the backdrop of the surge in the jobless claims in the U.S.in the first week of May.

The greenback however rallied against the pound sterling during the past week that also witnessed a dovish pause by the Bank of England. As widely expected, the BoE held rates steady while acknowledging that CPI inflation was expected to return to close to the 2 percent target in the near term. Votes in favor of a cut increased to two from one in the previous review, boosting rate cut expectations. Amidst the developments, the GBP/USD pair slipped 0.21 percent to 1.2521 on May 10 from 1.2547 a week earlier. The pair traded between the high of 1.2596 recorded on Monday and the low of 1.2446 recorded on Thursday.

The AUD/USD pair also declined 0.08 percent during the week ended May 10 amidst a not-so-hawkish monetary policy pause delivered by the Reserve Bank of Australia. The pair closed at 0.6603 on May 10 versus 0.6608 a week earlier. The week’s trading range for the pair was between the high of 0.6646 recorded on Tuesday and the low of 0.6557 recorded on Wednesday.

After a week of strong gains triggered by suspected currency market intervention by Japan, the Japanese yen reversed a portion of gains and declined against the U.S. Dollar. The USD/JPY pair, which had closed at 152.98 on May 3 increased 1.83 percent to 155.78 by May 10. The pair ranged between the low of 153.32 recorded on Monday and the high of 155.96 on Thursday.

On the horizon are speeches by Fed Chair Jerome Powell as well as release of the crucial CPI data from U.S. on Wednesday. Headline annual consumer price inflation in the U.S. is seen dropping to 3.4 percent in April from 3.5 percent in the previous month. The month-on month inflation is however seen steady at 0.4 percent. The producer price inflation due on Tuesday is also seen rising in the month of April. In anticipation, the Dollar Index has decreased to 105.11.

Key data releases for the ensuing week are unemployment rate from U.K. and the ZEW Economic Sentiment Index from Germany due on Tuesday, first quarter preliminary GDP readings from Japan late on Wednesday, as well as the Industrial Production and Retail Sales update from China on Thursday.

The EUR/USD pair has in the meanwhile increased to 1.0799 whereas the GBP/USD pair jumped to 1.2555. The AUD/USD pair rallied to 0.6623 whereas the USD/JPY pair is almost flat at 155.76.

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