Forex
Dollar steady as US inflation data takes spotlight
By Brigid Riley
TOKYO (Reuters) -The dollar consolidated against major peers on Monday as market participants awaited U.S. inflation data to assess the prospects of interest rate cuts this year.
After a softer-than-expected U.S. payrolls report for April and seemingly dovish Federal Reserve policy announcement earlier this month, expectations have increased for rate reductions this year.
Markets have priced in a 61.2% chance of some degree of rate reductions to begin at the Fed’s September meeting, with about 50 basis points of cuts in total expected, CME’s FedWatch Tool showed.
But comments by Fed officials last week were varied as speakers debated whether interest rates were high enough. A jump in consumers’ inflation expectations, revealed in a survey on Friday, could further complicate the conversation.
With recent data indicating the economy is slowing, investors are looking to confirm how sticky inflation is.
The market will have a chance this week, with inflation readings in the form of the producer price index (PPI) on Tuesday followed by the consumer price index (CPI) on Wednesday.
“For the wheels to truly fall off of the U.S. dollar, incoming data needs to point to disinflation, not just pockets of weakness here and there,” said Matt Simpson, senior market analyst at City Index.
“If inflation data ticks higher again this month it will surely undo the work of softer growth and slightly weaker employment figures.”
The , which measures the greenback against a basket of currencies, was flat at 105.31, following its first weekly gain last week after two successive weeks of decline.
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This week’s CPI will be crucial for the Federal Open Market Committee’s (FOMC) decision to start easing rates in September, said Carol Kong, a currency strategist at the Commonwealth Bank of Australia (OTC:).
“If we get a strong CPI this week, it will just leave the FOMC four more monthly CPI reports before the September meeting. I don’t think four benign CPI readings will give the FOMC enough confidence to start cutting rates in September.”
Fed Chair Jerome Powell will make an appearance on Tuesday at a meeting of the Foreign Bankers’ Association in Amsterdam.
INTERVENTION JITTERS
As markets look ahead this week to U.S. CPI, the yen won’t be far from traders’ minds amid an ongoing risk of currency intervention by Japanese authorities.
Against the yen , the dollar was holding solid at 155.80, after touching its highest since May 2 at 155.965.
The dollar has marched up against the yen after a 3% decline at the start of the month, its steepest weekly percentage drop since early December 2022, after two suspected interventions.
Those spikes of yen strength appear to have spooked some yen bears, at least for now.
Yen futures data from the CFTC showed non-commercial short positions have fallen sharply from the 179,919 contracts on April 23, which was the most since June 2007.
The currency received some support on Monday after the Bank of Japan sent a hawkish signal by cutting its offer amount for a segment of Japanese government bonds in the Asian morning.
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The euro was little changed at $1.07695 as the euro zone prepares for an inflation reading of its own on Friday.
Sterling was firm at $1.2522.
China’s slid 0.1% to 7.2414 while the fell to its lowest since April 30 at 7.2385, as traders awaited an announcement from the United States of new China tariffs.
At the same time, the Chinese central bank said over the weekend that new bank lending fell more than expected in April and broad credit growth hit a record low.
Separate data on Saturday showed Chinese consumer prices rose in April while producer prices extended declines.
The central bank pledged to support economic recovery.
In cryptocurrencies, bitcoin last rose 0.68% to $60,889.51.
Investing.com – The US dollar has gained more ground as the US presidential election draws near, UBS noted, with the market seeing rising odds of a win for Republican candidate Donald Trump.
A new USD-positive over the past week has been media reports of somewhat better outlook for Donald Trump in the latest polls, as outcomes that allow for policies such as more aggressive tariffs are viewed as more USD positive.
“Higher odds of a Trump presidency are likely to be associated with a stronger USD near term,” said analysts at UBS, in a note dated Oct. 16.
Where does this leave us now with our USD views?
Our expected ranges between Sep–Dec 2024 incorporated the possibility of a material USD rebound between now and year end, even if our year-end forecasts see a modestly lower USD from current levels.
Last week, with an eye to our year end forecast, we entered a long call reverse knockout, but we are not willing to implement a similar trade yet for and .
The spot is still far enough from our range extremes and high JPY implied volatility and negative carry make long JPY positions unattractive so close to US elections.
Turning to this week’s ECB meeting, the market is very confident that another 25bp rate cut will be delivered and we do not have a strong reason to disagree.
Market expectations are very muted for any form of surprise, and risk reversal skews bid again for EUR puts point to a market that is already primed for the risk of EUR softness.
With market pricing in line with our economists’ terminal rate expectations, we see EUR/USD as more exposed to US developments near-term, leaving us reluctant to fade recent softness on ECB reasons alone.
At 06:30 ET (10:30 GMT), EUR/USD rose 0.1% to 1.0894, USD/JPY gained 0.1% to 149.34 and AUD/USD fell 0.2% to 0.6685.
Investing.com – The European Central Bank holds its latest policy-setting meeting later this week, and Citigroup advises selling any rallies in the euro around this key event.
Markets are pricing in around 49 basis points of easing over the remaining two ECB meetings this year, which could limit dovish repricing around Thursday’s event, according to analysts at Citi, in a note dated Oct. 15.
“We see scope for a tactical bounce in EUR around this Thursday’s ECB meeting, which we like fading into November as US election risk premium materializes,” Citi said.
That said, “we like fading any subsequent rallies in EUR as we approach November and US election risk premium gets better priced.”
There is some evidence of this unfolding, the bank added, as EUR looks undervalued on its short-term fair value model and as Citi’s FX Positioning data suggests adding to EUR shorts.
“But our broader FX election basket still screens as undervalued relative to Trump betting markets, and we remain short EURUSD in both spot and options,” says Citi. “We would look to sell any retest of the 1.10 double top neckline — any break above there risks a move towards our adjusted stop of 1.1050, but if that resistance holds, we have higher conviction of a move towards our (and the double top) target of 1.08, with potential overshoot towards 1.07.”
At 05:25 ET (09:25 GMT), traded largely flat at 1.0892, almost 2% lower over the last month.
Investing.com – The U.S. dollar edged higher Wednesday, trading near two-month peaks on expectations of modest rate cuts from the Federal Reserve this year, while sterling slumped after benign inflation data.
At 04:15 ET (08:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 103.180, remaining close to Monday’s two-month peak.
Dollar helped by trimmed rate cut expectations
Recent data indicating a resilient economy coupled with slightly hotter-than-expected inflation in September have led market participants to trim bets for an aggressive U.S. rate reduction.
Adding to these expectations were comments from Atlanta Federal Reserve President on Tuesday, who said he had penciled in just one more interest rate reduction of 25 basis points this year when he updated his projections for last month’s U.S. central bank meeting.
Most market participants see two more cuts this year, totaling 50 bps, and traders currently lay 92% odds for a 25-basis-point cut when the Fed next decides policy on Nov. 7, with an 8% probability of no change, according to CME Group’s (NASDAQ:) FedWatch Tool.
Sterling slumps after inflation release
In Europe, slumped 0.5% to 1.3003, after data showed British inflation fell more than expected in September, paving the way for a rate cut next month.
The UK’s fell to 1.7% on an annual basis, below the forecast 1.9% and the 2.2% recorded a month earlier.
This was the first time it had fallen below the Bank of England’s 2% target since April 2021, and added to data seen earlier in the week that showed British pay grew at its slowest pace in more than two years.
“The data is unequivocally dovish for the Bank of England and paves the way for rate cuts at the two remaining meetings this year (November and December),” said analysts at ING, in a note.
“Given the comments by Governor Andrew Bailey earlier this month suggesting the BoE could increase the pace of easing, markets may be tempted to price in some chance of a 50bp rate cut in November.”
traded 0.1% lower to 1.0882, ahead of Thursday’s policy-setting meeting by the European Central Bank.
The has already lowered rates twice this year and a cut to the 3.5% deposit rate this week is almost fully priced in by financial markets.
“EUR/USD is predominantly driven by external factors. The substantial drop in oil prices has narrowed the scope for a further drop based on market factors, but we continue to suspect that pre-US election positioning should favor a weaker EUR/USD,” said ING.
Yuan nurses weekly losses
fell slightly to 7.1179, with the yuan nursing losses this week as sentiment soured over the country’s plans for more stimulus.
China’s Ministry of Finance said it will enact a slew of fiscal measures to boost growth, but did not specify the timing or size of the planned measures, spurring uncertainty over its effectiveness.
rose 0.2% to 149.43, with the pair climbing closer to the 150 resistance level.
data due later this week is expected to offer more cues on the Bank of Japan’s plans to hike rates further.
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