**Forex Weekly Outlook: Dollar Gains Amid GDP Hopes and Inflation Uncertainty**
*Original article credit: Baystreet.ca*
The forex market is wrapping up a volatile week, largely defined by shifting expectations around inflation trajectories, central bank policy decisions, and signs of economic growth. Major currency pairs have experienced turbulent movements as investors scrutinize economic data from the United States, the Eurozone, and Asia to project future monetary policy directions.
This week, the US dollar enjoyed a rally, supported by robust economic data and growing optimism surrounding the country’s economic resilience. In contrast, other major global currencies, including the Euro and Japanese Yen, have faced downward pressure due to weaker data prints and diverging central bank paths.
Below, we break down this week’s currency market developments, the macroeconomic drivers at play, and what traders and investors can anticipate in the coming weeks.
## US Dollar Strengthens as Economy Shows Resilience
The US dollar saw strong gains this week, supported by better-than-expected economic data, primarily the first quarter GDP revision and persistent concerns over inflation.
– The US economy grew at an annual rate of 1.3% in the first quarter of 2024, revised up from the previous 1.1%. This has signaled that the economy remains robust even as the Federal Reserve maintains tight monetary policy.
– The labor market remains resilient, with weekly jobless claims holding steady and May’s non-farm payroll data expected to show continued job creation.
– The Federal Reserve’s preferred inflation gauge, the Core PCE Price Index, showed a slight increase of 0.3% in April, aligning with expectations. However, this still suggests that inflation remains sticky and not cooling as quickly as many had hoped.
As a result, rate traders have adjusted their expectations, now forecasting fewer rate cuts for 2024 compared to earlier projections. The Federal Open Market Committee (FOMC) meeting in June is expected to keep rates on hold, and the market is pricing in a potential cut only by late Q3 or Q4.
### Market Reaction:
– The Dollar Index (DXY), which measures the greenback against six major currencies, rose above 104.5 this week.
– USD/JPY climbed past 157, bolstered by stark divergence in monetary policies between the Fed and the Bank of Japan.
– EUR/USD dipped below 1.08, reacting to weaker Eurozone inflation and softer German data.
## Euro Weakens as Eurozone Inflation Slows
The euro came under pressure this week as consumer price data showed that inflation is cooling down faster than expected in the Eurozone. The preliminary estimate for May’s annual headline inflation dipped to 2.6%, down from April’s 2.7%, while core inflation slowed to 2.9%.
The data has increased the likelihood that the European Central Bank (ECB) could start cutting rates sooner rather than later. Markets are now pricing in a rate cut at the ECB’s next meeting in June.
According to Christine Lagarde, President of the ECB, the governing council is “data-dependent” and will act accordingly. With inflation cooling and growth stagnating, easing monetary policy seems increasingly likely.
### Market Reaction:
– EUR/USD fell to multi-week lows amid expectations for a dovish ECB pivot.
– German retail sales and industrial orders also disappointed, reinforcing bearish sentiment.
– European bond yields declined, adding pressure on the euro.
## Japanese Yen Declines as BOJ Stays Dovish
The Japanese yen weakened again this week after comments from Bank of Japan (BOJ) officials hinted at a cautious and gradual approach to policy normalization.
Despite ending its Negative Interest Rate Policy (NIRP) earlier this year, the BOJ has acted more conservatively compared to other major central banks. Governor Kazuo Ueda’s recent statements indicate that drastic rate hikes aren’t on the table unless inflation consistently exceeds 2% for a sustained period.
Additionally, April’s inflation data in Japan moderated
Read more on USD/CAD trading.