Forex trading alert: The dollar hit its biggest three-week decline, with commodity currencies leading the gains

The dollar index fell on Friday (February 25), partially giving back the strong gains of the previous session, and the dollar strengthened for the third consecutive week despite Friday's correction. The dollar has been weak in recent weeks before Thursday's jump as rising tensions in Ukraine have sparked expectations that the Fed may be less aggressive in tightening policy as it tries to contain inflation.

On Thursday, the dollar index rose to its largest one-day percentage gain since November 10 last year, rising to 97.74, the highest level since June 30, 2020.

The White House said later on Friday that the United States would impose sanctions on Russian President Vladimir Putin and Foreign Minister Sergei Lavrov. After Russia invaded Ukraine, the United States sought to increase pressure on Russia.

Consumer spending grew faster than expected in January, despite rising price pressures and annual inflation at a level not seen in 40 years, U.S. economic data showed. The Price Index of Personal Consumption Expenditure (PCE) rose by 0.6 percent in January, following a 0.5 percent increase in December.

Brian Jacobsen, senior investment strategist at Allspring Global Investments, said the revisions to revenue and spending data showed the economy remained very resilient in the face of the Omicron variant and high oil prices. Hopefully, the situation in Russia is short-lived, but even if oil prices continue to rise, the economy should have enough fundamental strength to withstand high energy prices. The inflation data isn't great, but at least the month-on-month inflation data isn't higher, which should discourage some of the Fed's most hawkish members.

According to the FedWatch Tool of the Chicago Mercantile Exchange (CME), expectations for a rate hike of at least 50 basis points at the Fed's March meeting have fallen to 25 percent from around 34 percent a day ago.

In its latest monetary policy report to Congress, the Fed warned that inflation could last longer than expected if labor shortages and rapid wage rises continue.

EUR/USD rose 0.71% to 1.1271; speculative short retracements and corporate buying before the weekend supported the euro; a sell order at 1.1240 was digested; and a break above 1.1280/90 would trigger a stop-loss buy. On Thursday, the euro fell to 1.1105 against the dollar, the lowest level since June 1, 2020.

Lagarde said the central bank would do everything in its power to maintain stability in the eurozone's prices and financial system.

After the euro rebounded from its lowest level since June 2020, the euro's hedging costs retreated from the intra-year highs touched on Thursday.

ECB policymakers say the situation in Ukraine could lead the ECB to slow down its exit from stimulus measures.

Investors believe there is only a 4% chance that the ECB will raise the benchmark rate by 10 basis points at its Policy Meeting on March 10.

The pound rose 0.27 percent against the dollar to 1.3409, though it fell 1.3 percent weekly, its biggest since November.

Chris Turner, a FX strategist at ING, and others said in the report that a spike in Natural Gas prices in Europe could mean that the peak increase in ukling CPI is close to 8% instead of 7%, and will remain high for a longer period of time. This should keep the Bank of England on guard, and if the market calms down and the focus returns to macro tightening, EUR/GBP should be able to return to the 0.8280/8300 zone.

Safe-haven currencies lagged behind in the G-10, with USDJPY up 0.02% to 115.51 and USDCHF up 0.03% to 0.9253.

Despite the decline in crude oil prices, the Norwegian krone led the gains against the US dollar; the US dollar fell 1.4% to 8.8280 krones; the AUSTRALIAN dollar rose nearly 1% to 0.7231; and the NZD rose 0.78% to 0.6743.

Summary of institutional views

Summers worries that the Ukraine crisis could weaken the Fed's efforts to curb inflation

Former U.S. Treasury Secretary Summers said it was crucial that the Fed was not swayed by the Russia-Ukraine crisis and did not see it as a reason to delay the implementation of restrictive monetary policy. The danger is that teams that believe in "transience" evolve into teams that believe in supply shocks caused by oil and find further excuses to avoid taking the necessary steps to curb inflation.

Summers has long criticized the Fed for seeing last year's spike in consumer prices as a temporary shock that gives officials time to delay rate hikes. Now, with Russia's full-blown invasion of Ukraine, soaring energy prices threaten to push inflation to higher levels not seen since 1982. Summers said that with the arrival of the Ukraine crisis, the Already very difficult work of the Fed, which is already far behind the situation, has become more difficult.

Summers also said the impact of the geopolitical confrontation is in the direction of "stagflation," referring to an environment of high inflation and low growth. Oil and other commodity prices have risen to multi-year highs this week, adding new impetus to inflation. Higher costs, he said, would "reduce demand and spending levels because rising prices weaken purchasing power; some say we can't afford restrictive policies, and the problem is that we can't afford a completely unsustainable economic path that will ultimately lead to the economic woes, more suffering, and less employment for the most vulnerable in our society." This is a very serious moment.

Central bankers speak cautiously Expectations of a 50 basis point rate hike at the Bank of England have weakened

Traders' expectations that the Bank of England will raise rates by 50 basis points at its next policy meeting have weakened as Russia invaded Ukraine and officials who previously voted in favour of a sharper rate hike have weakened. In February, four BoE policymakers unexpectedly voted in favor of a 50 basis point hike, leading the market to prepare for such a rate hike in March, which would also be the First Move of the Bank of England since independence.

Now, investors are still expecting a 25 basis point rate hike next month, the bank's third consecutive rate hike since December last year. Market prices show expectations for a March rate hike of just 28 basis points, down from more than 44 basis points a week ago, indicating that bets on a sharp rate hike by the central bank have diminished.

This shift follows several BoE officials speaking publicly in an attempt to reverse market expectations of a sharp increase in interest rates. Central Bank Governor Andrew Bailey and chief economist Huw Pill both stressed the need to act with restraint. Meanwhile, Jonathan Haskel and Dave Ramsden, who supported a 50 basis point hike earlier this month, also said this week that their previous support for a large rate hike was a well-balanced decision, and did not hint that they would do the same in March.

Citigroup strategist Jamie Searle and others wrote in a note to clients that the BoE's message to the market this week was very clear: given the lagging effect of policy, short-term inflation cannot be reduced, so the market's expectations are too high. Still, the market is reluctant to give up entirely on the possibility of a 50 basis point rate hike at a future meeting.

Next week, the focus will shift to speeches by Catherine Mann and Michael Saunders, who also voted for a 50 basis point hike in February.

This article originated from Huitong Network