FX.co ★ Dollar Gains After A Hawkish FOMC

A hawkish Federal Reserve that tempered expectations for rate cuts bolstered the U.S. dollar during the week ending June 14th. The dollar also benefitted from a weaker euro due to political turmoil in France and a yen undermined by a dovish monetary policy update from the Bank of Japan. Consequently, the dollar gained against the euro, the British pound, and the Japanese yen but weakened against the Australian dollar, the Canadian dollar, the Swedish krona, and the Swiss franc.

The Dollar Index (DXY) increased by 0.63 percent over the week ending June 14th. From a level of 104.89 on June 7th, the index climbed steadily to close at 105.55. The DXY began the week at 104.93, bolstered by a stronger-than-expected job market update from the previous week. However, it dipped to a low of 104.26 on Wednesday as markets reacted positively to softer-than-expected U.S. CPI figures for May.

The headline annual CPI, expected to hold steady at 3.4 percent, fell to 3.3 percent. Its core component, anticipated to edge down to 3.5 percent from 3.6 percent the previous month, actually declined to 3.4 percent. Month-on-month, the reading, which was expected to drop to 0.1 percent from 0.3 percent, surprisingly showed no change. The core month-on-month component, expected to remain steady at 0.3 percent, edged down to 0.2 percent, beating market expectations.

However, the market's initial jubilation following the softer-than-anticipated CPI update was overshadowed by the Fed's hawkish guidance accompanying the FOMC meeting on Wednesday afternoon. The Federal Reserve decided to maintain the target range for the federal funds rate at 5.25 to 5.5 percent for the seventh consecutive meeting. It projected only one rate cut in 2024 and four cuts in 2025, a revision from its previous stance in March which hinted at three cuts in 2024. Additionally, the Fed raised its inflation forecast for 2024 to 2.6 percent, up from the 2.4 percent projected in March.

The Dollar Index surged further on Friday, hitting a weekly high of 105.81, buoyed by a weaker euro and yen, which constitute 57.6 percent and 13.6 percent of the index respectively.

Political uncertainty from snap elections in France weighed on the euro, causing the EUR/USD pair to drop 0.93 percent over the week. The pair closed at 1.0700, down from 1.0800 a week earlier. After peaking at 1.0853 on Wednesday, the pair tumbled to 1.0668 on Friday, marking the euro's worst week in two months.

Fed signals of fewer rate cuts also strengthened the dollar against the pound. The GBP/USD pair fell 0.31 percent over the week, closing at 1.2682 compared to 1.2721 the previous Friday. Despite reaching a high of 1.2862 on Wednesday, the pair slid to 1.2656 on Friday. Concurrently, concerns over the Bank of England's upcoming interest rate decision were exacerbated by data indicating an unexpected rise in unemployment and stagnant GDP growth.

Meanwhile, the greenback retreated against the Australian dollar. The AUD/USD pair, which closed at 0.6582 on June 7th, rallied to 0.6614 by June 14th, marking a 0.49 percent gain. The pair fluctuated between a low of 0.6575 on Monday and a high of 0.6705 on Wednesday, bolstered by employment data showing a 40,000 increase in employment and a drop in the unemployment rate to 4 percent.

The Bank of Japan's dovish monetary policy update on Thursday further weakened the yen. The USD/JPY pair rose 0.43 percent over the week, climbing to 157.37 on June 14th from 156.70 a week earlier. The pair ranged from a low of 155.72 on Wednesday to a high of 158.27 on Friday.

As the market awaited the release of retail sales data, the Dollar Index remained steady at around 105.52. The EUR/USD pair hovered near 1.0716, while the GBP/USD pair fell to 1.2672 ahead of Wednesday’s inflation update, the Bank of England’s interest rate decision on Thursday, and the release of retail sales data on Friday. The AUD/USD pair stood at 0.6597, with the Reserve Bank of Australia’s interest rate decision due on Tuesday, while the USD/JPY pair rallied to 157.88.