May 29 2024: The U.S. dollar edged higher in early European trade on Wednesday, supported by rising expectations that the Federal Reserve will delay interest rate cuts until later in the year.
At 04:10 ET (08:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 104.670, moving away from the near two-week low of 104.33 touched on Tuesday.
Dollar Boosted by Rising Yields
The dollar remains in a tight trading range as traders await Friday’s release of the U.S. core personal consumption expenditures (PCE) price index report, the Federal Reserve’s preferred measure of inflation.
The greenback has been buoyed by rising U.S. Treasury yields following a lackluster debt auction for two-year and five-year notes, raising doubts about demand for U.S. government debt.
“Tonight sees $44bn of seven-year US Treasuries auctioned,” said analysts at ING. “The ability of the U.S. government to fund its debt at the same price will be a hot topic for financial markets this year, but so far higher U.S. yields have been associated with a stronger dollar. We feel that relationship could break down at some point – but perhaps that is a story for next year.”
Uncertainty remains over the timing of the first interest rate cut by the Federal Reserve, with inflation still above target and the possibility of another rate hike not entirely off the table.
“I don’t think anybody has totally taken rate increases off the table,” said Neel Kashkari, President of the Federal Reserve Bank of Minneapolis. “I think the odds of us raising rates are quite low, but I don’t want to take anything off the table.”
Expectations are for the core PCE index to remain steady on a monthly basis, but any signs of continued inflationary pressures will boost the dollar.
Euro Awaits German CPI Release
In Europe, EUR/USD traded 0.1% lower at 1.0852, ahead of the release of German consumer inflation data, which will provide insights into the overall eurozone CPI release due at the end of the week.
The European Central Bank (ECB) is preparing for an interest rate cut next week, but uncertainty over subsequent actions persists. The euro is on track for a 1.7% gain against the dollar for the month, marking its first monthly gain in 2024.
“The highlight of the eurozone calendar this week will be Friday’s release of flash eurozone CPI for May. Input into that release will be today’s German CPI data, where consensus is looking for a slight uptick to 2.4% YoY from 2.2%,” added ING.
“This will not deter the European Central Bank from a rate cut next week but may see the market continue to pare back expectations of further rate cuts this year.”
GBP/USD edged higher to 1.2762, with the election campaign now in full swing.
“Labour’s Shadow Chancellor, Rachel Reeves, is making all the right fiscal noises – although the Labour Party may find they’ve boxed themselves in from a policy perspective should they win July’s general election,” said analysts at ING.
BOJ Provides Little Yen Support
In Asia, USD/JPY traded largely unchanged at 157.16, with the Japanese currency receiving little support from comments by Bank of Japan (BOJ) officials. BOJ member Adachi Seiji warned that the central bank could tighten policy hastily if yen weakness impacts inflation. He also forecast that inflation would increase in the Summer-Autumn period.
However, Seiji also stated that the BOJ needed to be cautious in tightening policy and that policy would remain accommodative in the near term to foster strength in the Japanese economy.
USD/CNY traded 0.1% higher at 7.2489, as a soft midpoint fix by the People’s Bank of China saw the pair reach its highest point since mid-November.
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