Dollar holds steady ahead of inflation-heavy data

The dollar remained relatively stable on Monday as investors braced for a data-heavy week, highlighted by a key U.S. inflation report that could provide insights into the global interest

The core personal consumption expenditures (PCE) price index, a key gauge of inflation favored by the Federal Reserve, is scheduled for release on Thursday. Expectations point to a 0.4% monthly increase in the index.

This week, inflation data from the euro zone, Japan, and Australia will be released, along with a rate decision from the Reserve Bank of New Zealand (RBNZ) and China PMI surveys.

The euro edged up 0.1% to $1.0834, marking gains against the dollar in eight out of the last nine trading sessions.

ECB officials have underscored their focus on inflation in the euro zone, particularly emphasizing the service sector and wage growth.

ECB President Christine Lagarde stated on Friday that wage growth had moderated, but cautioned against assuming that inflation had been conquered, emphasizing the need for continued vigilance.

„Euro zone inflation is expected to cool to 2.5% and yet the ECB minutes still show the reluctance from the ECB to even talk about cutting rates,“ said Fiona Cincotta, City Index market strategist.

“Part of it is the reluctance to talk about cutting rates, and we also saw inflation expectations in the euro zone ticked up very slightly, but also that upbeat mood on the back of earnings has been pulling some safe-haven flows out of the dollar and has pushed the euro higher,” she noted.

The euro’s strength has been significantly influenced by the decreasing disparity between where traders anticipate U.S. and euro zone interest rates to end the year.

Just two weeks ago, investors were anticipating that the Federal Reserve would cut rates by approximately 80 basis points this year, contrasting with around 100 bps of cuts from the European Central Bank. However, by Monday, that gap had nearly vanished.

Inflation in the spotlight

The main focus for investors this week will be Thursday’s U.S. core PCE data. Given hotter readings of producer and consumer inflation, there’s an increased likelihood that this measure might surpass expectations too. This could further delay expectations for when the Fed might deliver its first rate cut.

According to the CME FedWatch tool, markets currently indicate only a 20% probability of the Fed initiating rate cuts in May, a stark contrast from the nearly 90% chance estimated just a month earlier.

“If anything, the (data) may be stronger than markets currently expect, and that will likely give a modest boost to the dollar,” Carol Kong, a currency strategist at Commonwealth Bank of Australia, said.

The dollar index was slightly lower at 103.89.

Japan’s nationwide consumer prices are set to be released on Tuesday, with forecasts indicating that core inflation slowed to an annual rate of 1.8% in January, marking the lowest level since March 2022.

The anticipated slowdown in core inflation to 1.8% in January would complicate the Bank of Japan‚s plans to end negative interest rates in the coming months, likely keeping the yen under pressure in the near term.

The yen traded marginally lower at 150.61 per dollar, marking a decline of more than 6% against the U.S. currency since the beginning of the year.

“News that Japan fell into technical recession in H2 2023 will have dampened some of the market’s enthusiasm regarding the pace of monetary tightening from the BOJ,” said, Jane Foley, head of FX strategy at Rabobank.

The British pound advanced 0.1% to $1.2677, while slipping 0.1% against the euro to 85.48 pence.

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