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Dollar ticks up, US inflation data tops this week’s bill

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Dollar ticks up, US inflation data tops this week's bill
© Reuters. FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

By Alun John

LONDON (Reuters) -The dollar edged higher on Monday as a holiday in most major Asian markets subdued the start of what could turn into a busy week, with all eyes on U.S. inflation data for clues on when the Federal Reserve may start to cut rates.

The euro was down 0.14% $1.0769, edging off a 10-day high touched in early trading after the past week saw a small bounce back following steady declines in 2024. A reading of the euro zone’s economic growth in the fourth quarter on Wednesday could offer fresh direction.

The pound dropped 0.1% to $1.2632, though the Japanese yen strengthened a touch to 149.01 per dollar as the approaching release of U.S. CPI data for January on Tuesday capped moves.

Changing expectations of when and how quickly central banks will cut interest rates as inflation falls are a significant driver of currency markets at present.

Strong jobs data this month has largely taken a March Federal Reserve rate cut off the table, with markets currently seeing a move in May as more likely than not.

The U.S. data also caused market pricing for the first European Central Bank rate cuts to be pushed back, even though European economic data has been much less strong.

That lack of divergence between both the Fed and ECB and the Fed and other central banks has prevented the dollar moving significantly higher, said Simon Harvey, head of FX analysis for Monex Europe, and left the currency largely range bound, until the situation changes.

“In the interim we keep floating around, and US CPI will determine how the dollar trades within those ranges,” he said.

CORE CPI

Analysts expect U.S. core CPI to come in at 0.3% month on month in January, but a still elevated 3.8% year on year.

Bank of Italy governor Fabio Panetta said on Sunday the moment is “fast approaching” for the ECB to cut rates, but the market reaction was limited in both currencies and government bonds. [GVD/EUR]

ING analysts said that Panetta is “the most dovish voice in the (ECB’s rate setting) Governing Council”, and that his remarks differed not only from the hawks warning against cutting too early but also from other doves.

Hawks in central bank speak typically favour tighter monetary policy than do doves.

Elsewhere, there is plenty of data due this week in Britain including inflation and GDP numbers, with the former, on Wednesday, similarly likely to influence opinion on when the Bank of England will start to cut interest rates – it is currently seen lagging the Fed and European Central Bank.

“Net, we think the data will be negative for sterling, a lot of the headlines will be around recession, and the uptick in inflation pressures,” said Harvey.

Markets are also keeping an eye on the highly rate-sensitive Japanese yen, which strengthened sharply late last year as markets priced in early U.S. rate cuts, but has since weakened as that timing got pushed back.

Japanese Finance Minister Shunichi Suzuki said on Friday that authorities were closely watching FX moves.

“Dollar/yen is likely to be driven mainly by U.S. developments in the near future, but intervention warnings are likely to increase in frequency around the 150 level,” said Barclays analysts in a note.

Japanese authorities intervened in late 2022 to prop up the yen, which weakened to as much as 151.94 per dollar.

Forex

Dollar drifts lower; euro edges higher ahead of key wages data

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Dollar drifts lower; euro edges higher ahead of key wages data
© Reuters.

Investing.com – The U.S. dollar slipped lower in early European trade Tuesday, but remains close to recent highs given the prospects of higher-for-longer U.S. interest rates, while the euro faces a wages test later in the session.

At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 104.082. 

Dollar quiet ahead of Fed minutes

The greenback has edged lower Tuesday with U.S. traders set to return after Monday’s Presidents’ Day holiday, but remained close to three-month highs amid mounting expectations that the Federal Reserve will delay the start of its rate-cutting cycle to the start of the summer compared with the expected March at the beginning of the year.

Data released last week showed both U.S. and increased more than expected in January, while Fed official Mary Daly stated on Friday that there is still “more work to do” to bring inflation back down to the U.S. central bank’s 2% target.

The U.S. economic data calendar is largely empty Tuesday, likely resulting in quiet trading ahead of the release of the of the Fed meeting from last month, scheduled for Wednesday. 

“The view that the U.S. data will turn at some point, the Federal Reserve will cut, and the dollar will decline remains a consensus one (and often translates into selling USD rallies),” said analysts at ING, in a note. 

“We favor a strong dollar in the near term as U.S. data remains supportive, but this looks increasingly to be the perfect recipe for range-bound trading.”

Euro awaits ECB wage data

In Europe, traded 0.2% higher at 1.0795, helped data showing the eurozone’s current account in a larger than expected surplus in December, pointing to economic recovery.

Traders are now keenly awaiting the release of regional fourth-quarter negotiated wages data, due later in the session, given the importance Europe’s central bank has placed on wage growth as it attempts to contain inflation.

“This wage indicator had been on a steady rise since mid-2022, and a decline, even if contained, should be welcomed by the ECB,” ING added.

traded 0.1% higher at 1.2605, in quiet trading ahead of the release of the monthly surveys of business activity later this week.

The data is expected to show that British business activity is improving, led by a surge in service-sector activity to its fastest pace since last May.

This follows Friday’s data which showed U.K. grew at their fastest pace in nearly three years in January.

China cuts key rate, yen remains weak

In Asia, traded largely unchanged at 7.1983, helped by a strong daily midpoint fix after the People’s Bank of China cut its benchmark five-year loan prime rate by a bigger-than-expected 25 basis points to 3.95%, a record low. 

The move provided little cheer to Asian markets as it also underscored increasing government anxiety over an economic slowdown in Asia’s biggest economy.

rose 0.1% to 150.31, with the yen weakening past the 150 level as the prospect of a slow exit from the Bank of Japan’s ultra-dovish monetary stance put pressure on the Japanese currency.

Breaks above 150 have attracted government intervention in the past, with officials also offering verbal warnings on any such moves last week.

 

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Forex

Investors are buying back into the pound’s pizazz

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Investors are buying back into the pound's pizazz
© Reuters. FILE PHOTO: Pound and U.S. dollar banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

By Amanda Cooper

LONDON (Reuters) – The pound is playing catch-up with the dollar as investors beef up their bullish positions, and may get extra oomph from data this week showing British business activity is among the strongest in the developed world.

Monthly surveys of business activity this week are expected to show the UK topped the league table in February, well ahead of the euro zone and beating even the United States, which in the last year has been one of the few major countries not to have shown a dip into contraction.

This so-called “U.S. exceptionalism” has kept the dollar buoyant and investor confidence in a soft landing for the U.S. economy running high.

Economists polled by Reuters expect an index of British business activity to have risen to 52.7 in early February, led by a surge in service-sector activity to its fastest pace since last May.

Sterling is down just 0.9% against the dollar so far in 2024, having clawed back up from a 1.5% year-to-date loss two weeks ago.

Just four months ago, the International Monetary Fund declared Britain would be the slowest-growing economy among the Group of Seven nations in 2024.

A lot has changed since then, not least Germany tilting into actual recession and France barely growing. Data last week showed the UK, too, registered two straight quarters of negative growth last year.

The euro has fallen to its weakest in six months against sterling, having lost around 2% in value against its cross-Channel rival since the start of the year.

For the past few months, investors have enjoyed the pound’s higher yield that has derived from the view that, even though the economy is sluggish, persistent inflation will mean the Bank of England will have to keep interest rates higher for longer.

Weekly data from the Commodity Futures Trading Commission (CFTC) shows speculators lifted their bullish sterling position to $3.971 billion in the week to Feb 13, just shy of last July’s nine-year high.

Leveraged funds, which include hedge funds and money managers, have aggressively added to their long sterling positions since early December, and now hold their largest bet on a pound rally since October.

Aside from the pound’s yield appeal, investors may be taking heart finally from the data too.

JPMorgan nudged up its 2024 UK growth forecast in January, while Deutsche Bank last week said it had made a modest upward tweak to its quarterly growth estimates.

Bank of America has turned bullish on sterling and last week boosted its year-end target for the pound to $1.37 – some 8.5% above where it is trading right now.

In a note last week, ING issued a reminder not to “get carried away” by signs of green shoots in the economy – the BoE is focussed on services and wage inflation right now – but acknowledged that the outlook for Britain’s economy is starting to brighten.

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Forex

Asia FX creeps lower, dollar firm as China rate cut gives little support

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Asia FX creeps lower, dollar firm as China rate cut gives little support
© Reuters.

Investing.com– Most Asian currencies crept lower on Tuesday amid persistent concerns over a slowing Chinese economic recovery and higher-for-longer U.S. interest rates, while the dollar edged up and remained near three-month highs.

The People’s Bank of China cut its benchmark five-year by a bigger-than-expected 25 basis points to 3.95%, a record low. But the move provided little cheer to Asian markets, given that it also underscored increasing government anxiety over an economic slowdown in Asia’s biggest economy.

The fell slightly after the move, although bigger losses in the currency were held back by a stronger-than-expected midpoint fix from the PBOC. 

Still, the yuan remained close to its weakest level in three months, and was also close to  breaking above the 7.2 level to the dollar. 

Broader Asian currencies were still reeling from a string of stronger-than-expected U.S. inflation readings from last week, which put the dollar within sight of a three-month high. But the greenback saw few cues for movement from a U.S. holiday on Monday.

The and both rose 0.1% each in Asian trade, buoyed by the prospect of higher-for-longer U.S. interest rates in 2024. 

The was among the worst-hit by recent fears of higher U.S. rates, with the currency weakening past the 150 level on Tuesday. The prospect of a slow exit from the Bank of Japan’s ultra-dovish monetary stance also put pressure on the yen.

Still, the yen found some support around 150 as traders watched for any potential intervention in currency markets by the Japanese government. Breaks above 150 have attracted government intervention in the past, with officials also offering verbal warnings on any such moves last week.

The fell 0.1%, even as the showed the bank still remained inclined towards hiking interest rates further to curb sticky inflation.

But the RBA also said that it was prepared to loosen monetary conditions swiftly if the Australian economy cooled too quickly due to pressure from high rates. 

The RBA had kept rates steady at 4.35% earlier in February, but had struck an unexpectedly hawkish tone- which offered some support to the Aussie. 

Among other Asian currencies, the fell 0.1%, while the fell 0.3%.

The firmed slightly below the 83 level, but still remained vulnerable.

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