Dollar Holds Steady as Focus Shifts to US Inflation Data

The dollar held its ground against other major currencies on Monday as investors awaited the release of U.S. inflation data. This data is crucial for assessing whether there could be interest rate cuts later this year.

Following a weaker-than-anticipated U.S. payrolls report for April and what appears to be a dovish stance from the Federal Reserve in its recent policy announcement, there’s growing anticipation for interest rate cuts later this year.

According to CME’s FedWatch Tool, markets are currently pricing in a 61.2% probability of interest rate cuts commencing at the Federal Reserve’s September meeting. The anticipated cuts are expected to total around 50 basis points.

Comments from Federal Reserve officials last week were mixed, with speakers discussing whether interest rates were at an appropriate level. The debate was further complicated by a survey released on Friday showing an increase in consumers‘ inflation expectations.

Investors are closely monitoring recent data suggesting a slowdown in the economy to confirm the persistence of inflationary pressures.

This week, the market will have an opportunity to gauge inflation through key readings such as the producer price index (PPI) on Tuesday, followed by the consumer price index (CPI) on Wednesday.

Matt Simpson, senior market analyst at City Index, remarked, „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.“

„If inflation data ticks higher again this month it will surely undo the work of softer growth and slightly weaker employment figures.“

The dollar index, which gauges the greenback against a basket of currencies, held steady at 105.31, maintaining its position after posting its first weekly gain last week following two consecutive weeks of decline.

„This week’s CPI will be crucial for the Federal Open Market Committee’s (FOMC) decision to start easing rates in September,“ stated Carol Kong, a currency strategist at the Commonwealth Bank of Australia (OTC:CMWAY).

„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.“

Federal Reserve Chair Jerome Powell is scheduled to speak on Tuesday at a meeting of the Foreign Bankers‘ Association in Amsterdam.

As markets focus on the upcoming U.S. CPI data this week, the yen remains a key point of concern for traders due to the persistent risk of currency intervention by Japanese authorities.

The dollar remained strong against the yen, holding steady at 155.80, after reaching its highest level since May 2 at 155.965.

The dollar has surged against the yen following a 3% decline earlier in the month, marking its most significant weekly percentage drop since early December 2022, following two suspected interventions.

The spikes of yen strength seem to have unsettled some yen bears, at least temporarily.

Yen futures data from the CFTC indicated that non-commercial short positions have declined notably from the peak of 179,919 contracts on April 23, marking the highest level since June 2007.

The yen found some support on Monday following a hawkish signal from the Bank of Japan, which reduced its offer amount for a segment of Japanese government bonds during the Asian morning.

The euro remained relatively unchanged at $1.07695 as the euro zone anticipated its own inflation reading scheduled for Friday.

Sterling held steady at $1.2522.

The offshore yuan dipped by 0.1% to 7.2414 against the dollar, while the onshore yuan dropped to its lowest level since April 30, reaching 7.2385. Traders remained on edge, anticipating an announcement from the United States regarding new tariffs on China.

The Chinese central bank reported over the weekend that new bank lending in April fell more than anticipated, while broad credit growth hit a record low.

Separate data released on Saturday indicated that Chinese consumer prices increased in April, while producer prices continued to decline.

The central bank pledged its support for economic recovery.

In the realm of cryptocurrencies, Bitcoin saw a modest increase, rising by 0.68% to reach $60,889.51.

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