On Monday, the dollar showed strength as the market braced for a week packed with crucial economic releases, providing insights into the global interest rate outlook, with a particular focus on the U.S. inflation reading.
The core personal consumption expenditures (PCE) price index, considered by the Federal Reserve as its preferred inflation measure, is scheduled for Thursday, with expectations pointing to a 0.4% increase on a monthly basis.
This week's data calendar also includes inflation figures for the euro zone, Japan, and Australia, a rate decision from the Reserve Bank of New Zealand (RBNZ), and PMI readings in China.
Ahead of these releases, the dollar saw gains in early Asia trade. The euro slipped by 0.04% to $1.0817, and the New Zealand dollar fell by 0.55% to $0.6164. Last week, the kiwi had risen 1.2%, benefiting from a weakened dollar and the anticipation of a potential rate hike from the RBNZ on Wednesday.
Although most economists expect the central bank to maintain rates, futures indicate a roughly 30% chance of a 25-basis-point increase.
Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA), commented, "I think the RBNZ will keep the OCR (official cash rate) unchanged, and that will likely cause the kiwi to fall if markets unwind pricing for a near-term rate hike. But any falls in the kiwi will likely be pretty small because we expect the RBNZ to remain pretty hawkish."
Sterling remained flat at $1.2671, while the Australian dollar dipped by 0.07% to $0.6559.
Turning to Japan, data on nationwide consumer prices is expected on Tuesday, forecasting a slowdown in core inflation to an annual rate of 1.8% in January, the lowest since March 2022.
This poses a challenge to the Bank of Japan's plans to end negative interest rates in the coming months, keeping the yen under near-term pressure.
The Japanese currency was marginally higher at 150.40 per dollar, having already depreciated more than 6% against the greenback this year due to significant interest rate differentials between the U.S. and Japan.
Jane Foley, head of FX strategy at Rabobank, noted, "Since the tail end of last year, the market has been focused on the BOJ's March or April policy meetings as likely bringing the BOJ's negative interest rate policy to an end."
Recent data from the U.S. Commodity Futures Trading Commission indicates a notable increase in short positions on the yen, reaching around $10 billion, the highest since November.
In contrast, a series of higher-than-expected U.S. producer prices and consumer prices have shifted the risks to Thursday's core PCE price index data toward the upside. This may further delay expectations for multiple Fed rate cuts this year. Market indicators currently suggest just slightly over a 20% chance of the Fed beginning rate cuts in May, compared to a 90% chance a month ago, according to the CME FedWatch tool.
CBA's Kong remarked, "If anything, the (data) may be stronger than markets currently expect, and that will likely give a modest boost to the dollar. But at the same time, any gains in the dollar will likely be pretty modest. I don't think markets will really expect another rate hike from the FOMC."
The dollar index was last 0.04% higher at 104.01.
Paraphrasing text from "Investing" all rights reserved by the original author.
