Aug 14 2024: The dollar remained near a one-week low on Wednesday as traders anticipated that upcoming U.S. consumer price data could support a Federal Reserve rate cut next month. Meanwhile, the British pound eased following softer-than-expected inflation figures.
New Zealand’s dollar fell by over 1% after the Reserve Bank of New Zealand cut its key cash rate and signaled potential further reductions in a notable dovish shift.
Market participants are waiting for the U.S. inflation report at 1230 GMT (8:30 a.m. ET), which is projected to show a 0.2% increase in consumer prices for July, following a 0.1% decrease the previous month.
The dollar index, which tracks the greenback against major currencies, declined 0.1% to 102.52. This follows a 0.5% drop on Tuesday, driven by a slower-than-expected rise in producer prices that reinforced expectations of a U.S. rate cut next month.
The dollar’s weakness allowed the euro to reach a seven-month high of $1.1010, surpassing its previous peak during the market turbulence of August 5.
Volkmar Baur, FX analyst at Commerzbank, noted, “Traders are positioning for a weaker CPI number, which poses a risk: if CPI meets expectations or shows a slight upside surprise, the dollar could strengthen again.” He added that a weaker CPI should not sway the Fed towards a 50-basis point cut, as inflation is a lagging indicator and a weaker CPI wouldn’t necessarily signal an impending recession.
Prior to the producer price data, traders had largely expected a September rate cut. Following the data, expectations for a 50 basis-point cut increased to 52.5% from 50% the day before, according to CME’s FedWatch Tool.
Sterling and Kiwi Currency Movements
The British pound slipped 0.2% to $1.28415 after July’s consumer price inflation in the UK rose for the first time this year, but the increase was smaller than anticipated, particularly in services prices closely watched by the Bank of England (BoE). Financial markets now price in a 44% chance of a quarter-point BoE rate cut in September, up from 36% before the data.
Commerzbank’s Baur commented, “The data suggests stabilization in inflation rather than further disinflation. We expect the BoE to be more cautious compared to the Fed and the ECB due to persistent inflation and a strengthening economic cycle.”
The New Zealand dollar dropped as much as 1.2% after the Reserve Bank of New Zealand cut its cash rate by a quarter point, marking its first reduction since early 2020 and occurring a year earlier than projected. The currency was last trading 1.1% lower at $0.60060.
Tony Sycamore, market analyst at IG, remarked, “The RBNZ’s dovish shift to cut rates has provided relief for households and businesses, just three months after hinting at further rate hikes.”
Yen’s Reaction to Japanese Political Developments
Japanese Prime Minister Fumio Kishida’s decision not to seek reelection in his party’s leadership race had little impact on markets, analysts noted. The yen weakened slightly against the dollar, which gained 0.2% to 147.20 yen.
Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management, stated, “The impact on the economy and financial markets should be relatively limited, as Kishida’s policies are broad and not focused on specific themes. The key issue will be who succeeds him.”
