Dollar set to post weekly loss; Fed rate peak looms

Investing.com - The U.S. dollar weakened in early European trade Friday, extending earlier losses as traders positioned for the end of the Federal Reserve’s rate-hiking cycle, although moves have been limited ahead of the release of key nonfarm payrolls data later in the session. 

At 03:20 ET (07:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 105.892, on course to drop 0.5% this week, just its third week of losses in the last 16 weeks.

Dollar heading for weekly loss

The dollar has lost a lot of its popularity this week after the Fed kept rates steady, and offered somewhat dovish signals on more interest rate hikes even while keeping the possibility open. 

This spurred increased bets that the central bank was done with its rate hikes for the year, and will begin cutting rates from mid-2024. 

“Despite the Fed retaining a tightening bias, it seems investors are more interested in reading and trading a Federal Reserve pause. This has seen interest rate volatility drop and triggered renewed demand for high-yielding FX through the carry trade,” said analysts at ING, in a note.

Attention now turns to the release of the key nonfarm payrolls data for October due later in the day. 

Any signs of resilience in the labor market would give the Fed more impetus to hike interest rates, which could in turn reverse some of the dollar weakness seen this week. 

Analysts expect to see the U.S. economy added 180,000 jobs in October, down from September's 336,000. The unemployment rate is expected to remain the same, however, at 3.8%, while average hourly earnings are expected to have increased by 0.3% in October, following a 0.2% gain in September.

Bank of England retains hawkish stance

GBP/USD traded largely unchanged at 1.2202, having risen 0.4% on Thursday, and was on course for a 0.7% weekly gain. 

The Bank of England also held rates steady on Thursday, but the central bank stressed that it did not expect to start cutting them any time soon with inflation still more than three times higher than its medium-term 2% target.

Bank of England chief economist Huw Pill is set to provide an online presentation of the central bank's new forecasts and latest policy decision later in the session.

Euro offers more upside

EUR/USD rose 0.1% to 1.0630, on course to record a weekly gain of 0.6%, with traders now debating how long the European Central Bank will keep interest rates high given the regional economic weakness.

ECB board member Isabel Schnabel said on Thursday the "last mile" of disinflation may be the toughest, and the central bank cannot yet close the door on further rate rises.

“The eurozone data has been nothing but euro-negative this week (weak growth and confidence, weaker inflation), but the calmer dollar environment warns that EUR/USD could creep higher again,” added ING.

Aussie dollar in demand

Elsewhere, USD/JPY fell 0.1% to 150.36, in holiday-thinned trade, while USD/CNY edged lower to 7.3152, after a private survey showed earlier Friday that Chinese service sector activity grew less than expected in October, although it did accelerate slightly from the prior month.

AUD/USD rose 0.1% to 0.6439, on course for weekly gains of around 1.7%, amid increasing bets that the Reserve Bank of Australia will hike interest rates when it meets next week.