Currencies tread with caution ahead of U.S. inflation test
Dollar Steady as Markets Await U.S. Inflation Data #
The dollar remained stable in early trading on Tuesday, with the yen moving slightly away from one-month highs. Investors are preparing for upcoming U.S. inflation data and reassessing expectations of a large interest rate cut from the Federal Reserve starting next week.
A recent mixed labor report did not provide a clear indication of whether the Fed would implement a standard 25 basis point rate cut or a larger 50 bps cut at its upcoming policy meeting.
Traders are now focusing on the upcoming U.S. consumer price index report for further policy insights, although the Fed has emphasized that employment has become a more significant factor than inflation. The headline CPI is anticipated to have increased by 0.2% month-on-month in August, unchanged from the previous month.
As the recent employment data failed to make a strong case for a 50 bps cut, markets are now looking to the U.S. inflation data to better understand the pace of potential Fed rate cuts. Economists note that economic growth is clearly losing momentum, and markets are now focused on whether the economy will experience a soft or hard landing.
Investor attention will also be on the upcoming televised U.S. Presidential debate, which could significantly impact the November election.
The dollar showed a slight increase against the yen, moving away from the one-month low touched recently. Sterling reached a near three-week low earlier in the session.
The dollar index, which measures the U.S. currency against six rivals, rose after falling the previous week as traders’ rate cut expectations shifted.
Markets are currently fully pricing in a 25 bps cut for the next Fed meeting, with reduced expectations for a 50 bps cut compared to earlier projections.
A weaker-than-expected inflation report could strengthen market expectations of a 50 bps cut, while a steady reading may leave the debate between a 25 bps and 50 bps cut unresolved. Some analysts expect the USD to trade sideways to higher, as current Fed easing expectations still appear excessive.
For the following year, traders anticipate significant easing, an increase from previous expectations.
Fed policymakers recently indicated their readiness to begin a series of rate cuts, noting a cooling in the labor market that could worsen without a policy shift.
The euro showed little change ahead of the European Central Bank policy meeting, where another rate cut seems highly likely. The focus will be on the messaging from central bankers.
In other currencies, both the Australian and New Zealand dollars experienced slight declines, touching multi-week lows.