Weekly currency forecast: US dollar to drop as GDP and inflation cool?

Last week saw the US dollar strike its highest levels in over a month as the escalating crisis in the Middle East saw anxious investors opt for the safe-haven ‘greenback’.

This week, softer American data could see USD shed its gains. Meanwhile, the European Central Bank (ECB) holds its first policy meeting of 2024.

Pound

Sterling faced mixed movement last week. An unexpected uptick in UK inflation saw the pound jump higher on Wednesday. However, a huge slump in British retail sales on Friday saw GBP trim its gains.

This week, the UK’s latest PMI results are in the spotlight for GBP investors. If the preliminary surveys point to an expansion in service sector activity this month, Sterling could strengthen.

Euro

The euro rose against its riskier rivals last week but struggled elsewhere, as mixed economic data failed to provide EUR with consistent support. The currency’s negative correlation with a stronger US dollar also stifled its potential.

This week, the European Central Bank’s first interest rate decision of 2024 is in focus. The single currency could climb if the ECB continues to push back on rate cut speculation. However, policymakers’ concerns about the Eurozone’s economic outlook could weigh on EUR.

US dollar

A souring market mood boosted demand for the safe-haven US dollar last week, as the crisis in the Middle East escalated. The mood improved slightly by the end of the session, tempering USD’s gains.

In the second half of the coming week we have the US GDP figures for the fourth quarter of 2023 and the core PCE price index – the Federal Reserve’s preferred measure of inflation – for December. If US growth and inflation both cooled at the end of last year, the ‘greenback’ could slump amid Fed rate cut speculation.

Australian dollar

Widespread risk aversion and weak domestic data saw the Australian dollar plunge last week, with AUD striking multi-month lows against some peers.

The ‘Aussie’ could suffer the same fate again this week if markets remain anxious about the crisis in the Middle East and Australia’s PMI surveys reveal an ongoing contraction in business activity.