Markets brace for US inflation, yen strengthens on BOJ remarks

The dollar moved towards monthly gains on Thursday amid European inflation data releases and ahead of anticipated U.S. economic indicators. Concurrently, the yen recovered slightly as a policymaker hinted at the possibility of exiting ultra-easy policies.

Bitcoin surged, surpassing $63,000 early in the European morning, marking a nearly 50% gain in February. This surge represents the largest monthly increase since December 2020, with a record high above $69,000 now in sight. At the time of reporting, it stood at $63,051.

The dollar dipped 0.66% against the yen to 149.75 following Bank of Japan board member Hajime Takata’s remarks. Takata expressed optimism about reaching the bank’s 2% inflation target, suggesting a potential shift away from negative rates and yield caps.

The dollar’s significant daily decline against the yen in 2024 marks a notable event, reflecting the yen’s limited periods of strength this year. Despite this, the dollar remains up 1.8% against the Japanese currency for the month of February.

“Takata’s remarks should add to conviction that an earlier than expected hike at the March meeting should not be ruled out,” said currency strategist at OCBC, Christopher Wong.

“With JPY shorts at record highs, unwinding of shorts should see JPY bears run for cover.”

The euro inched up by 0.1% to $1.0847, maintaining relative stability for the month. Similarly, sterling remained largely flat at $1.2670.

The common currency slightly strengthened following the release of German provincial flash inflation data, indicating that month-on-month CPI in February was higher than in January across several of the first provinces to report figures.

Additional provincial data and Germany-wide inflation figures are expected later in the day. In separate reports released on Thursday, French consumer prices increased by 3.1% year-on-year in February, slightly exceeding expectations due to higher energy prices. Meanwhile, prices in Spain rose by 2.9%, consistent with expectations for the same period.

The Federal Reserve’s preferred gauge of U.S. inflation, and therefore the most significant inflation indicator for global markets, is the core personal consumption expenditures (PCE) price index. This data is scheduled for release at 1330 GMT on Thursday.

Forecasts indicate a month-on-month increase of 0.4%.

Not long ago, investors were anticipating just a 0.2% increase, but elevated readings on both consumer and producer prices indicate that the risk is tilted towards a result as high as 0.5%.

“A stronger than expected PCE deflator can cause markets to reduce pricing for a May rate cut even further, supporting U.S. dollar,” said Kristina Clifton, Commonwealth Bank of Australia (OTC:CMWAY) currency strategist.

Currently, markets indicate approximately a 20% probability of a Fed easing in May, and they have postponed the anticipated timing of a cut to June. Futures suggest slightly over three 25 basis point cuts this year, compared to five anticipated at the beginning of the month.

In February, the Australian and New Zealand dollars have depreciated as expectations solidified that rate hikes have concluded in the Southern Hemisphere.

The New Zealand dollar, in particular, held losses at $0.6091, declining 1.2% against the dollar a day earlier following the central bank’s decision to keep rates unchanged and unexpectedly adjust its rates forecast downward. Meanwhile, the Australian dollar edged up by 0.14% to $0.6504 on Thursday, marking a monthly decline of 0.8%.

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