Most Asian currencies weakened on Thursday as the dollar rebounded from its seven-month lows due to some bargain buying, although traders remained largely skeptical about the greenback amid expectations of upcoming interest rate cuts.
The Japanese yen softened after strong gains earlier in the week, but positive sentiment towards Japan persisted, bolstered by encouraging Purchasing Managers’ Index (PMI) data.
Broader Asian currencies also experienced gains earlier this week, driven by growing confidence that the Federal Reserve will begin cutting interest rates in September. However, weak U.S. labor market data released on Wednesday dampened risk sentiment, reigniting fears of a potential recession in the U.S.
Dollar Rebounds from 7-Month Lows; Focus on Rate Cuts and Recession Concerns
The dollar index and dollar index futures both rose by 0.2% during Asian trading hours, recovering from three consecutive days of steep declines that had pushed the greenback to seven-month lows.
The dollar’s recent weakness was driven by increasing expectations of a September interest rate cut, particularly after the minutes from the Federal Reserve’s late-July meeting, released on Wednesday, indicated that most policymakers favored lower rates.
A significant downward revision in U.S. payroll data for the year ending in March 2024 further supported the case for reduced interest rates. However, this revision also revived concerns about a U.S. recession, especially given the continued weakness in payroll data for recent months.
Attention is now focused on Fed Chair Jerome Powell’s address at the Jackson Hole Symposium on Friday, which is expected to provide further insights into the economic outlook.
Japanese Yen Steadies as Services Sector Shows Growth
The Japanese yen dipped slightly on Thursday but maintained most of its gains from earlier in the week, as economic data fueled speculation of more interest rate hikes by the Bank of Japan. The USD/JPY pair hovered around the mid-145 yen level.
PMI data revealed steady growth in Japan’s services sector for the second consecutive month, offsetting a contraction in manufacturing activity.
The strength in the services sector was largely driven by increased local demand, as private consumption rose amid growing wages. This uptick in demand could lead to higher inflation, potentially prompting the BOJ to consider further interest rate hikes.
Japanese consumer inflation data, due on Friday, is expected to offer additional insights into the economic outlook.
Broader Asian Currencies Remain Muted Amid Mixed Signals
Broader Asian currencies were largely muted as markets weighed the prospects of a U.S. recession against the possibility of lower interest rates.
The Chinese yuan (USD/CNY) pair remained flat, while the South Korean won (USD/KRW) pair rose 0.2% after the Bank of Korea kept interest rates steady and hinted at a potential rate cut later this year.
The Australian dollar (AUD/USD) pair fell 0.1%, cooling off after a recent rally, while the Singapore dollar (USD/SGD) pair edged up 0.1%.
The Indian rupee (USD/INR) pair rose slightly, remaining close to its record high.
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