Euro steadies as EZ avoids recession, dollar eases ahead of Fed decision

© Reuters. People visit a currency exchange office in Istanbul, Turkey July 18, 2023. REUTERS/Dilara Senkaya/File Photo

By Joice Alves and Brigid Riley

LONDON/TOKYO (Reuters) – The euro edged lower on Tuesday after data showed the euro zone narrowly avoided a technical recession in the fourth quarter, while the U.S. dollar edged higher, as traders awaited the Federal Reserve’s monetary policy decision this week.

Gross domestic product (GDP) in the 20 countries sharing the euro was flat in the fourth quarter against the previous three months, mainly thanks to strong growth in Spain and Portugal and a modest increase in Italy, while the German economy shrank in the final three months of 2023.

The euro was down 0.05% at $1.0827 against the dollar, as expectations are for a stronger U.S. outlook than in the euro zone, which has led investors to fully pricing in a rate cut by the European Central Bank (ECB) in April.

“For the ECB, today’s figure eases the pressure somewhat, but it is clear that the so-called soft landing being pursued by (ECB President Christine) Lagarde has been somewhat softer than many would have liked,” said Joshua Mahony, Chief Market Analyst at Scope Markets.

The single currency is down about 2% in January.

“Risks remain tilted to the downside for the single currency as long as these rate-cut expectations prevail among investors,” UniCredit analysts told clients in a note.

U.S. DATA, FED IN FOCUS

Data on job openings from the U.S. Department of Labor Statistics due later on Tuesday will in the meantime offer a prelude to the closely watched payroll report to be released on Friday

The dollar index was 0.04% higher at 103.50 as market participants moved cautiously ahead of the two-day Fed meeting that begins on Tuesday.

With the Fed expected to hold interest rates steady, markets will focus on the tone that Fed Chair Jerome Powell strikes at the press conference on Wednesday and any hints of rate cuts in the near future.

“After Fed Chairman Jerome Powell’s dovish comments at the press conference following the last meeting, market participants are likely to be looking for more precise information on the timing of the first rate cut,” said Michael Pfister, FX Analyst at Commerzbank (ETR:CBKG).

Markets are currently pricing in a 46.6% chance that the U.S. central bank will begin cutting in March, dropping from 73.4% a month ago, according to the CME Group’s (NASDAQ:CME) FedWatch Tool, as data has been reinforcing the view that the U.S. economy remains resilient.

Tuesday’s U.S. job opening figures will kick off a week of domestic jobs data, culminating in the January U.S. payrolls report on Friday. The data will give further indications of the state of the world’s largest economy.

Sterling slid 0.24% to $1.2678 ahead of the Bank of England’s monetary policy meeting this week.

The U.S. currency slid 0.15% to 147.27 against the yen.

With Japanese policy normalisation looking more likely in the second quarter, when the Bank of Japan (BOJ) will have additional wage data, the dollar-yen rate will “be more driven by the Fed than any expectations of a policy shift by the BOJ in the short term,” said Wei Liang Chang, currency and credit strategist at DBS.

“We thus expect dollar/yen to ease more pronouncedly towards the end of Q1.”

Japan’s jobless rate fell to 2.4% in December from the previous month, government data showed on Tuesday, just under economists’ median forecast of 2.5% in a Reuters poll.