Inflation Data Douses Large Rate Cut Expectations

12 Sep 2024 , 10:14 AM

The dollar traded around a four-week high against the euro on Thursday, as evidence of some stickiness in US inflation strengthened hopes that the Federal Reserve will avoid a large interest rate decrease next week.

Meanwhile, the European Central Bank (ECB) is largely expected to lower interest rates by a quarter-point later on Thursday, with investors looking for clues as to when the monetary body may cut again.

The dollar rose against the yen after a volatile day on Wednesday that saw the US currency fall as much as 1.24% to its lowest level this year before recovering all of its losses following consumer price data.

Junko Nakagawa, a Bank of Japan board member, reiterated the central bank’s tightening bias early Wednesday, stating that low real rates allow for more rate hikes.

On Thursday, another BOJ board member Naoki Tamura, a policy hawk, warned the market’s forecast rate of tightening could be too slow, helping to keep the yen weak.

The US consumer price index (CPI) increased by 0.2% last month, mirroring the increase in July. Excluding the volatile food and energy components, the gauge rose 0.3%, outpacing the previous month’s 0.2% increase.

As a result, traders have basically priced out the possibility of a 50 basis point (bp) rate cut on September 18, reducing the odds to 15% vs 85% for a 25-bp reduction.

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