Dollar set for strong quarterly gains as Powell stays hawkish

The U.S. dollar stabilized in early European trade Friday, but is on course to record strong quarterly gains as traders anticipate the U.S. Federal Reserve raising interest rates further as the year progresses.

At 02:00 ET (06:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded marginally lower at 102.980, but is heading for a gain of about 0.7% in the second quarter.

Powell points to further hikes
Fed Chair Jerome Powell has been pretty clear over the last few weeks, including at the European Central Bank’s annual gathering in Portugal earlier this week, that the U.S. central bank is likely to resume its rate-hiking cycle after pausing in June.

Data released on Thursday showed that the U.S. economy grew much more than initially thought in the first quarter, while the jobless claims data indicated a still strong labor market.

“Central bank communication at this week’s Sintra conference in Portugal has stayed pretty hawkish. The core message seems to be that low unemployment rates have allowed economies to withstand large tightening cycles reasonably well, meaning that inflation has not fallen as much as expected,” said analysts at ING, in a note.

“Expectations for the duration and terminal rates for tightening cycles are being revised higher. This is most credibly being done in the U.S., where the economy appears to be outperforming.”

The focus now falls later Friday on the release of the personal consumption expenditures index, the Fed’s favorite gauge of inflation, which is expected to have remained steady in May from the prior month, pressuring the Fed into keeping rates high to curb sticky inflation.

Eurozone June CPI due
Back in Europe, EUR/USD rose 0.1% to 1.0874, ahead of the release of the June consumer price index for the eurozone as a whole.

This is expected to fall to 5.6% in June from 6.1% in May, but German consumer prices rose by much more than expected in June, and this creates the possibility of an upside surprise given the dominance of the German economy.

European Central Bank President Christine Lagarde has largely cemented expectations earlier this week for a ninth consecutive rise in interest rates in July, and this hawkish tone is set to prompt gains of roughly 1.7% for the euro against the dollar this month.

U.K. GDP edges higher
GBP/USD rose 0.2% to 1.2633, with sterling on course for a 1.4% monthly gain despite first quarter gross domestic product growing just 0.1% on the quarter.

However, despite this weak growth, traders continue to price in more rate hikes from the Bank of England as the country’s inflation rate remained at 8.7% in May, the highest of any major advanced economy.

Yen heads for hefty quarterly loss
USD/JPY fell 0.1% to 144.64, retreating after reaching a high of 145.07 in early Asia trade, its lowest in over seven months, but still heading for a quarterly loss of more than 8%.

Data on Friday showed core consumer prices in Tokyo rose 3.2% in June from a year earlier, once more above the Bank of Japan’s 2% target, but new Governor Kazuo Ueda has stated that the central bank will maintain its accommodative monetary policy for some time yet.

Elsewhere, the risk-sensitive AUD/USD rose 0.2% to 0.6629 amid speculation that the Reserve Bank of Australia will hike rates next week to curb sticky inflation, while USD/CNY edged lower to 7.2521 after softer-than-expected Chinese purchasing managers’ index data.

Dollar set for strong quarterly gains as Powell stays hawkish