Written by Lei Wee
SINGAPORE (Reuters) – The dollar edged ahead on Monday ahead of a busy week of key economic announcements centered on U.S. inflation data and further clues about the outlook for global interest rates.
The Core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s recommended inflation measure, was released on Thursday and is expected to rise 0.4% on a monthly basis.
This week, the data calendar will also feature inflation data from the euro area, Japan and Australia, along with Reserve Bank of New Zealand (RBNZ) interest rate decisions and China’s PMI statistics.
Ahead of the announcement, the US dollar was mostly modestly higher in early Asian trading, with the euro down 0.04% to $1.0817 and the New Zealand dollar down 0.55% to $0.6164.
The kiwi had gained 1.2% last week, helped by broad dollar weakness and the risk of an RBNZ rate hike on Wednesday. Most economists expect the central bank to keep interest rates on hold, but futures give a roughly 30% chance of a 25 basis point rise.
Carol Conn, currency strategist at Commonwealth Bank of Australia, said: “I think the RBNZ will keep the OCR (Official Cash Rate) unchanged, but if the market eases pricing in short-term interest rate hikes, the Kiwi market could fall. (CBA).
“However, the RBNZ is expected to remain fairly hawkish, so any kiwi declines are likely to be fairly modest.”
The pound was flat at $1.2671, while the Australian dollar was down 0.07% at $0.6559.
Inflation challenges
Japan’s national consumer price data is due to be released on Tuesday, with core inflation expected to slow to an annual rate of 1.8% in January, the lowest level since March 2022.
That would complicate the Bank of Japan’s plan to lift negative interest rates in the coming months and keep the yen under pressure in the short term.
Japan’s currency last appreciated slightly at $150.40, but due to the large interest rate differential between the United States and Japan, it has already fallen more than 6% against the dollar this year.
“Since the end of last year, markets have been focusing on the Bank of Japan’s policy meeting in March or April as it is likely to end its negative interest rate policy,” said Jane Foley, head of foreign exchange strategy at Rabobank.
“News that Japan has entered a technical recession in the second half of 2023 will dampen some market enthusiasm for the Bank of Japan’s pace of monetary tightening.”
Short positions in the yen soared to about $10 billion as of last week, the most since November, according to the latest data from the U.S. Commodity Futures Trading Commission.
In contrast, risks to Thursday’s core PCE price index data are skewed to the upside due to recent stronger-than-expected increases in U.S. producer and consumer prices, and expectations that the Fed will make significant rate cuts this year are skewed to the upside. There will be further setbacks.
According to the CME FedWatch tool, the market is currently pricing in a little over 20% chance that the Fed will start cutting rates in May, compared to a 90% chance a month ago.
“If anything, (the statistics) may be stronger than the market is currently expecting, which is likely to push the dollar slightly higher,” CBA’s Kong said.
“But at the same time, any dollar appreciation will be quite modest. I don’t think the market is really expecting the FOMC to raise rates again.”
The dollar index was last up 0.04% at 104.01.
(Reporting by Rae Wee; Editing by Jamie Freed)
