Euro steadies as eurozone avoids recession, greenback eases ahead of Fed decision

THE euro steadied on Tuesday (Jan 30) after data showed the eurozone narrowly avoided a technical recession in the fourth quarter, while the US dollar edged lower, as traders awaited the Federal Reserve’s monetary policy decision this week.

Gross domestic product 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 edged up 0.14 per cent at US$1.0846 against the US dollar, as expectations are for a stronger US outlook than in the eurozone, which has led investors to fully pricing in a rate cut by the European Central Bank 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 1.7 per cent in January. It fell to an almost seven-week low on Monday.

“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.

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

The US dollar index was 0.06 per cent lower at 103.40 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.

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“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.

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

Sterling slid 0.2 per cent to US$1.2680 ahead of the Bank of England’s monetary policy meeting this week.

The US currency slid 0.1 per cent to 147.37 against the yen.

With Japanese policy normalisation looking more likely in the second quarter, when the Bank of Japan will have additional wage data, the US dollar-yen rate is expected to be more driven by Fed expectations, an analyst said.

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