FOREX-Wage Data Limits the Dollar's Gains ahead of the Fed's Rate Announcement.
The dollar dipped on Tuesday, giving up previous gains, as statistics revealed that labor expenses in the United States climbed less than expected in the fourth quarter, and before the Federal Reserve is set to raise interest rates by 25 basis points on Wednesday.
The Employment Cost Index, the most comprehensive indicator of labor expenses, increased by 1.0% last quarter. This was the weakest increase since the fourth quarter of 2021, and it came after a 1.2% increase in the July-September period. Nonetheless, it is not expected to deter the US Federal Reserve from raising interest rates further.
"Despite coming in below forecasts, it's still a relatively robust print, which suggests the Fed will continue to sound hawkish," said Bipan Rai, the North American head of FX strategy at CIBC Capital Markets in Toronto.
Other statistics released on Tuesday revealed that house price growth slowed significantly in November, with a 9.2% increase in the month. Fed funds futures traders expect the Fed's benchmark rate to reach 4.91% in June, up from 4.33% currently.
However, investors remain pessimistic about the US economy and believe the Fed will have to lower rates back to 4.48% by December. This is despite Fed officials emphasizing the need of keeping rates in restrictive territory for an extended length of time to reduce inflation.
"(Fed Chair Jerome) Powell and the FOMC will want to underline the fact that we are going to see higher rates for a little bit longer. "At this point, it's all about whether or not the market believes that narrative," Rai said.
The dollar index was recently down 0.21% versus a basket of currencies, closing at 102.03. It had previously reached a two-week high of 102.61, which experts said was likely due to repositioning towards month-end. In addition, the dollar is trading slightly above critical technical support against major currencies such as the euro.
The index is expected to lose 1.39% in January, after dropping 2.26% in December and 5.07% in November, its largest monthly loss since September 2010. The November losses were caused by predictions that the Fed would start reducing rate rises, which it did in December.
The index has declined after reaching a 20-year high of 114.78 on September 28. The euro rose 0.21% on the day to $1.0867, after dipping as low as $1.0802.
Data released on Tuesday indicated that the eurozone managed to avoid a recession in the last three months of 2022, despite sky-high energy costs, dwindling confidence, and increasing interest rates taking a toll on the economy that is expected to last into this year.
Both the European Central Bank and the Bank of England are anticipated to raise interest rates by 50 basis points on Thursday.
The British pound dropped 0.16% versus the US dollar to $1.2329.
The dollar declined 0.24% to 130.12 yen versus the Japanese yen.