Market Analysis

As decreasing activity causes the dollar to bounce, the euro gives back some of its gains

Amos Simanungkalit · 24 Apr20.2K Views

In early European trading on Wednesday, the U.S. dollar saw a recovery following a previous session's decline, as traders monitored upcoming economic data for insights into the Federal Reserve's monetary policy direction.

At 04:40 ET (08:40 GMT), the Dollar Index, which gauges the dollar against a basket of six other currencies, rose by 0.2% to 105.695, rebounding from its overnight dip to its lowest level since April 12.

The recent de-escalation of tensions in the Middle East, coupled with Iran's indication of avoiding a full-scale conflict with Israel, led to a retreat of the safe-haven dollar from its recent highs. However, Tuesday's drop in the greenback was largely spurred by data revealing a slowdown in U.S. business growth, hitting a four-month low in April.

Despite this, Federal Reserve officials have maintained a mostly hawkish stance, suggesting that one data point is unlikely to prompt earlier rate cuts, with analysts noting that significant shifts in Fed expectations would require more substantial indicators such as lower inflation or weak employment figures.

Market focus now turns to first-quarter GDP data on Thursday and the personal consumption expenditures index, the Fed's preferred inflation gauge, on Friday, which could trigger more significant market movements.

In Europe, the euro relinquished some of its gains from the previous session, with EUR/USD slipping 0.1% to 1.0689, despite upbeat business activity data indicating the eurozone's fastest expansion in nearly a year.

Germany's Ifo business climate index also showed improvement in early April, rising to 89.4 from the previous month's revised 87.9. While the European Central Bank has hinted at a rate cut at its upcoming meeting in June, Bundesbank President Joachim Nagel suggested that further easing would depend on eurozone inflation trends.

GBP/USD declined by 0.1% to 1.2430, retracing some gains from the prior session, buoyed by strong data showing accelerated business activity in Britain. Expectations for a rate cut by the Bank of England this year remain, but robust economic indicators could delay such actions until after summer.