US dollar up slightly after GDP data; euro falls after ECB, Lagarde comments

THE greenback edged higher on Thursday (Jan 25) after data showed the world’s largest economy grew at a faster pace than expected in the fourth quarter, suggesting the Federal Reserve would be in no rush to cut interest rates amid a generally stable economy.

The US dollar index, a gauge of the greenback’s value versus six major currencies, was last up 0.1 per cent at 103.37.

The euro, on the other hand, fell against the US dollar, after mixed comments from European Central Bank (ECB) president Christine Lagarde. She said it was “premature to discuss rate cuts” for the eurozone economy, but noted that the risks to economic growth remain “tilted to the downside”.

The ECB, at its policy meeting on Thursday, left borrowing costs unchanged.

The single eurozone currency last traded at US$1.0863, down 0.2 per cent.

In the United States, the Bureau of Economic Analysis’s advance gross domestic product (GDP) estimate showed that gross domestic product in the last quarter increased at a 3.3 per cent annualised rate, compared with the consensus forecasts of growth at a 2 per cent rate.

“It’s only fitting that a year that defied expectations would show growth that exceeded expectations. You have to squint to see weakness in the numbers,” said Brian Jacobsen, chief economist, at Annex Wealth Management.

“What’s not to like? The problem for the market is that the Fed doesn’t have to be in a hurry to cut. Rather than cutting sooner and faster, the Fed can cut later and slower.”

Post-data, US rate futures market priced in a roughly 47 per cent chance of easing at the March meeting, up from late Wednesday’s 40 per cent probability and the 80 per cent chance factored in two weeks ago, according to LSEG’s rate probability app.

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The market is pricing in the first rate-cut to occur at the May meeting with a 91 per cent probability.

Next week, the Fed is widely expected to stand pat but comments from chair Jerome Powell will be intensely scrutinised to assess if the US central bank is ready to start cutting interest rates.

For the ECB, investors priced in rate cuts of 130 basis points (bps) in 2024, roughly in line with the level seen before the ECB statement. They were discounting 150 bps in mid-January.

Aside from GDP data, a separate report from the Labor Department showed that initial claims for state unemployment benefits increased 25,000 to a seasonally-adjusted 214,000 for the week ended Jan 20. Economists had forecast 200,000 claims in the latest week.

Its market impact was muted though, given the release of the GDP data.

In other currency pairs, the US dollar slid 0.2 per cent versus the yen to 147.22.

Sterling was slightly down at US$1.2717. REUTERS