Global markets began the week in a state of anticipation and caution, as regional tensions in the Middle East persist alongside a busy schedule of monetary policy meetings by major central banks, led by the U.S. Federal Reserve.
Despite heightened geopolitical risks, the U.S. Dollar Index edged slightly lower in early trading, giving up some of the gains made at the end of last week. The decline was driven by fading fears of broader military escalation, particularly as global shipping through key straits continued uninterrupted.
Nevertheless, the dollar remained relatively firm against a basket of major currencies, supported by a combination of technical and economic factors, most notably expectations that the Federal Reserve will hold interest rates steady. This relative strength weighed on most Asian currencies, which opened the week on a softer note.
Market consensus suggests the Fed will leave interest rates unchanged at its upcoming meeting, with attention focused on forward guidance. Key areas of interest include the Fed’s assessment of rising energy prices and signs of slowing economic growth, weighed against persistent inflationary pressures.
The Fed is also facing political pressure to begin easing, but current conditions make a rate hold with a cautious tone the most likely scenario. In Europe, the euro continued to post steady gains against the dollar, buoyed by confidence in the European Central Bank’s stance. Meanwhile, the British pound remained range-bound ahead of the Bank of England’s decision, amid mixed economic data showing both weak growth and elevated inflation.
The Japanese yen traditionally seen as a safe haven declined by about 0.3% against the dollar ahead of the Bank of Japan’s meeting. While no change in rates is expected, market participants are watching closely for signals about the bank’s bond purchase strategy. With domestic inflation holding steady, Governor Kazuo Ueda is expected to adopt a more hawkish tone without implementing immediate policy changes.
In China, economic data came in mixed. Industrial production grew at a slower pace than expected due to weak external demand, while retail sales exceeded forecasts, supported by local holidays and strong e-commerce activity. This contrast prompted the People’s Bank of China to maintain a wait and see stance, with most analysts expecting no change in the loan prime rate.
Across Asia, the week opened with a generally weaker tone for regional currencies, reflecting cautious sentiment and a lack of strong local drivers. The Australian dollar slipped by approximately 0.1%, while the Singapore dollar posted a slight gain.
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