Dollar gains ground in anticipation of inflation data

27 May 2024 , 08:38 AM

As investors turned their attention to U.S., European, and Japanese inflation statistics to inform the forecast for interest rates globally, the dollar had a stable start to the week.

In recent months, the chase for “carry” has dominated foreign exchange trade, punishing low-rate currencies and bolstering the dollar while U.S. data has blown hot and cold and undermined policymakers’ confidence in the outlook for rates.

Tight ranges have been hugged by some major couples. The euro was trading at $1.0846, near the middle of a range it has been in for more than a year. The euro gained 0.9% vs the dollar last week. Due to Monday’s holidays in the US and Britain, trading was light.

For confirmation of a European rate cut that traders have priced for next week, eyes will be on Germany’s inflation on Wednesday and the euro zone’s data on Friday.

At $1.2735, sterling was testing the upper end of a range it has maintained this year. As investors have lowered their expectations for a U.S. interest rate cut, the value of the Australian and New Zealand dollars has declined from their recent highs, with the Australian dollar trading at $0.6626 and the kiwi at $0.6122.

The Federal Reserve’s preferred inflation gauge, the core personal consumption expenditures price index, is expected to show month-over-month stability on Friday; however, any surprise could have an impact on currency markets.

The dollar had weakened following data that indicated a halt in consumer price increases in April and weak retail sales, but it rebounded last week as a result of better-than-expected PMI survey results.

Investors have been chasing income and selling low yield currencies like the yen, yuan, and Swiss franc against the euro and the dollar while the rates are still unknown.

The Swiss franc has been weakening all year, and this week it reached its lowest level since April 2023 at 0.9928 francs to the euro. The Chinese yuan ended the week at a value of less than 7.24 against the US dollar, the lowest since early May.

Due to alleged intervention by Japanese authorities at the end of April and the beginning of May, the yen may record its first monthly gain of the year this month; but, since then, it has been declining towards multi-decade lows.

Tokyo CPI is a good indicator of the overall trend in the country and is scheduled for release on Friday. This week, traders will be keenly monitoring the U.S. decision to reduce equity-market settlement from two days to one, as they anticipate it could push trading into the calm early hours of Asia.

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