Dollar heads for positive week; sterling hit by GDP weakness

Investing.com – The US dollar rose Friday, heading towards its best week in a month, as traders scaled back expectations for aggressive US policy easing next year, while weak growth data weighed on sterling.

At 05:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 106.780, on course for a weekly gain of around 1%, after earlier climbing to an over 2 week high. 

Dollar in demand

This followed the release of a stronger than expected headline US producer price figure, which added to concerns of prices remaining sticky into the new year as incoming President Donald Trump threatens trade and tax policies which could prove to be inflationary.

The idea of a more cautious approach to Fed easing over 2025 contrasts with the likely moves by the US central bank’s main rivals following a rash of rate cuts over the past few days, with outsized 50 bp moves in Switzerland and Canada and a 25 bp easing by the European Central Bank.

“Despite seasonal trends for a weaker dollar, the dollar is actually holding onto gains quite well,” said analysts at ING, in a note. “This is because the anticipation of Trump’s policy agenda is keeping dollar rate spreads wide and the currencies of trading partners under pressure. It is hard to see this state of affairs changing before Trump’s January inauguration.”

Sterling falls after GDP disappointment

In Europe, EUR/USD rose 0.1% to 1.0473, having slipped sharply in the wake of Thursday’s policy-setting meeting by the European Central Bank.

The ECB cut rates by 25 bps, as expected, but regional economic weakness suggests more interest rate cuts are likely in the new year, as confirmed by  ECB policymaker and Bank of France head Francois Villeroy de Galhau.

“There will be further rate cuts next year,” Villeroy told BFM business radio.

“There is no commitment in advance to a trajectory on rates…I note that we are collectively rather comfortable with the financial markets’ interest rate forecasts for next year,” he added.

“The direction of travel is lower for eurozone rates and rates will not necessarily be stopping at neutral (2.00/.2.25%),” ING added.

GBP/USD traded 0.3% lower to 1.2633 after data showed that the UK economy contracted again in October, with economic activity in the sixth largest economy in the world remaining very subdued.

The UK economy contracted by 0.1% in October, matching the prior month, resulting in an annual growth rate of 1.3%.

This was a lot weaker than expected, as the October GDP release had been expected to have risen 0.1% in October, an annual increase of 1.6%.

BOJ meeting in focus

In Asia, USD/CNY rose 0.3% to 7.2878, hovering near a two-year high mark, after China’s two-day Central Economic Work Conference concluded on Thursday, leaving markets disappointed due to lack of aggressive stimulus measures.

USD/JPY gained 0.6% to 153.50, following media reports which indicated that the Bank of Japan was likely to keep interest rates unchanged next week, in contrast to earlier expectations of a hike.