Dollar was broadly steady ahead of key US inflation data

Reuters: The dollar was broadly steady on Wednesday ahead of a key U.S. inflation report later in the day, though it rose on the yen as traders assessed comments from Japan’s top central banker on a possible early exit from its negative interest rate policy.

DOLLAR WAS BROADLY STEADY

The U.S. currency advanced around 0.2% to 147.36 against the yen, which retraced its biggest one-day percentage rise in two months on Monday, following the remarks from Bank of Japan Governor Kazuo Ueda over the weekend. As investors have more time to consider Ueda’s comments, “the fundamental driver of the upside pressures on yen” have returned, said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “I think the market also is reading the statement more carefully. The statement to our mind was quite a conditional one, Ueda didn’t promise anything.”

Influential ruling party lawmaker Hiroshige Seko on Tuesday also signalled his preference for ultra-loose monetary policy, after Ueda’s comments pushed up the yen and bond yields. The yen has been under relentless pressure against the dollar as the BOJ remains a dovish outlier among global central banks, especially since the Federal Reserve began its aggressive rate-hike cycle in March 2022. In the broader currency market, the dollar stood firm, though moves were subdued as traders stayed on guard ahead of the closely-watched U.S. inflation reading out later on Wednesday.

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Sterling slipped 0.01% to $1.2482, while the Australian dollar fell 0.04% to $0.64015. The U.S. dollar index measure against a basket of key rivals was last steady at 104.67, after slipping to a one-week low on Monday and clocking its largest daily fall in two months. Analysts attributed the slide to an unwinding of long dollar positions, after a recent run of resilient U.S. economic data boosted the greenback. Wednesday’s U.S. consumer price index data for August comes just a week before Federal Reserve officials gather to decide on interest rate policy.

While the central bank is largely expected to keep rates on hold at next week’s meeting, according to CME’s FedWatch Tool, the Fed’s next move in November remains more uncertain. “I think there is a chance for the Fed to raise interest rates another time this year,” said Tina Teng, market analyst at CMC Markets. Elsewhere, the euro ticked down 0.07% to $1.0745, after hitting a one-week high of $1.0777 in the previous session as markets raised their bets of further rate hikes from the European Central Bank ahead of its monetary policy decision.

A Reuters report said the ECB expects inflation in the 20-nation euro zone to remain above 3% next year, bolstering the case for a tenth consecutive interest rate increase on Thursday. “In recent months, European inflation, core inflation in particular, has fallen more slowly than expected. This has given the ECB some serious headaches,” said analysts at Rabobank in a note. “The high inflation rate warrants another rate hike, but the economic indicators signal that a recession is imminent.”

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BRITISH POUND

FXStreet: The GBP/USD pair edges higher during the Asian session on Wednesday, albeit lacks follow-through and remains confined in a familiar range held over the past week or so. Spot prices currently trade around the 1.2500 psychological mark and remain well within the striking distance of a three-month low touched last Thursday. The US Dollar languishes near the weekly low and turns out to be a key factor acting as a tailwind for the GBP/USD pair, though expectations that the Bank of England is nearing the end of its rate-hiking cycle cap the upside. BoE Governor Andrew Bailey told lawmakers last week that the central bank is much nearer to ending its run of rate increases. Furthermore, the UK employment details released on Tuesday pointed to a cooling labour market and do not justify another rate hike after the widely anticipated lift-off in September.

The Federal Reserve, on the other hand, is expected to pause at its policy meeting next week. The markets, however, are still pricing in the possibility of one more 25 bps rate hike by the end of this year. The bets were reaffirmed by the upbeat US macro data released last week, which pointed to a resilient economy. Moreover, the fact that inflation is not cooling fast enough should allow the Fed to keep rates higher for longer. Hence, the focus remains on the US CPI report, due later today, which will provide fresh cues about the Fed’s future rate hike path.

In the meantime, the prospects for further policy tightening by the US central bank remain supportive of elevated US Treasury bond yields. This, along with the prevalent cautious market mood, should act as a tailwind for the safe-haven Greenback and contribute to keeping a lid on any meaningful appreciating move for the GBP/USD pair. Traders now look to the UK macro data dump, including the monthly GDP report, to grab short-term opportunities during the European session. The fundamental backdrop, meanwhile, warrants some caution for bulls.

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SOUTH AFRICAN RAND

Reuters: The South African rand weakened against the dollar on Tuesday as markets await U.S. inflation data on Wednesday that could shed light on the Federal Reserve’s interest rate path. At 1512 GMT, the rand traded at 18.9550 against the dollar, nearly 0.5% weaker than its previous close. The dollar last traded around 0.22% stronger against a basket of global currencies. “With no high impact South African specific data scheduled throughout the week, U.S. and Chinese influences will play a major role,” said DailyFX analyst Warren Venketas in a research note.

The rand had jumped over 1% on Monday following encouraging economic data out of China, its biggest trading partner. Like other emerging market currencies, the risk-sensitive rand often takes cues from global economic factors such as U.S. monetary policy in the absence of major local drivers. Shares on the Johannesburg Stock Exchange were little changed, with the broader all-share index and blue-chip Top-40 index ending near their previous close. South Africa’s benchmark 2030 government bond was marginally weaker, with the yield up 1 basis point at 10.400%.

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GLOBAL MARKETS

Reuters: Asian shares were subdued after Wall Street wobbled overnight with markets bracing for key U.S. inflation data on Wednesday, while an oil price spike stoked anxiety about persistent price pressures, complicating the interest rate outlook. The euro edged higher and markets moved to favour a hike from Europe’s central bank on Thursday, following a Reuters report that the European Central Bank expects inflation will stay above 3% next year in its updated forecasts, well above its target of 2%. MSCI’s broadest index of Asia-Pacific shares outside Japan was flat while Tokyo’s Nikkei eased 0.2%. Australia’s resource-heavy shares lost 0.7%, Chinese blue-chips were flat but Hong Kong’s Hang Seng index moved 0.6% higher.

At the forefront of markets’ minds is the crucial U.S. Consumer Price Index report expected on Wednesday, which should shed further light on the inflation outlook and provide some clarity about whether the Federal Reserve is done tightening. While core CPI is seen cooling to 4.3% year-on-year in August from 4.7%, rising energy costs are forecast to keep headline inflation hot. And the latest spike in oil prices to ten-month highs is unlikely to escape the Fed’s attention.

“What’s happening with oil and headline inflation is still too soon for the Fed to be signaling the all clear as far as the risks of some incremental tightening before they’re done,” said Ray Attrill, a currency strategist at National Australia Bank. “When you have those sort of volatility in the food and energy components, the worry is that if it’s persistent then it does tend to bleed into core inflation measures over time.” Oil prices extended gains on Wednesday. Brent crude futures settled at $92.24 per barrel, nearing a ten-month peak that it hit a session ago on persistent supply concerns. U.S. West Texas Intermediate crude futures were up 0.3% at $89.08.

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On Wall Street, the S&P 500 fell 0.6% overnight, the Nasdaq declined 1% while Dow Jones was mostly flat. Apple dropped 1.8% after unveiling new iPhones while not increasing prices as it faces a global smartphone glut, and Oracle shares tumbled more than 13% after the cloud-services provider forecast current-quarter revenue below targets. The euro firmed 30 pips to $1.0765 on the Reuters story while markets moved to favour a rate hike from the ECB on Thursday with a 75% probability, compared with a split chance previously.

The U.S. dollar recovered some of its recent losses on the yen, up 0.2% to 147.35 yen after comments from Japan’s top central banker on a possible early exit from its negative interest rate policy sent the yen soaring. Treasury yields climbed higher on Wednesday, with the two-year note touching 5.0264%, compared with a U.S. close of 5.005%. Ten-year yields held at 4.2881%, up from the close of 4.264%. The gold price was flat at $1,912.85 per ounce.

Published by the Mercury Team on 13 September 2023