June 13 2024: The U.S. dollar fell on Thursday as traders balanced the factors of benign U.S. inflation with a more hawkish Federal Reserve stance.
At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.3% at 104.340, after reaching its strongest level since mid-May earlier in the week.
Dollar Awaits PPI Release
The dollar experienced volatile trading on Wednesday, dropping immediately after the U.S. inflation report showed consumer prices were flat month-to-month in May, against expectations of a 0.1% rise.
However, it recovered some losses when the Federal Reserve left the funds rate on hold at 5.25%-5.5% and indicated that policymakers’ median projection for rate cuts this year had fallen to just one, from three in March.
Despite this, Goldman economists stated in a note, “We continue to expect a first rate cut in September and a second cut in December.”
This brings Thursday’s Producer Price Index (PPI) release into focus, with the headline figure expected to show monthly growth of 0.1% in May, down from 0.5% growth the previous month.
The core PPI, excluding volatile food and energy prices, is expected to show monthly growth of 0.3%, down from 0.5% growth the prior month.
“A soft PPI reading today will raise expectations of another ‘on-target’ 0.2% month-on-month core PCE reading and give both the Fed and the market a little more confidence that the central bank may be able to cut rates in September after all,” analysts at ING stated in a note. “This is why we have a down arrow on the dollar today.”
Euro Strengthens After More Inflation Data
EUR/USD rose 0.1% to 1.0812, continuing to gain after a 0.6% increase overnight, as traders processed additional regional inflation data.
German wholesale prices fell by 0.7% in May compared to the same month last year, while Spanish consumer prices rose 3.6% annually in May.
“EUR/USD did well to spike to 1.0850 yesterday and probably argues that we are in some kind of broad 1.0720-1.0900 trading range for the near term,” ING analysts noted.
“Here, the two opposing forces will be softer US price and activity data potentially dragging the dollar complex lower set against French political risk, where a further risk premium could still be built into the euro.”
GBP/USD Slightly Down, Awaiting U.K. CPI Data
GBP/USD fell 0.1% to 1.2790, after rising 0.5% overnight to $1.2798 following the U.S. inflation data release, with the U.K. set to release its monthly CPI number next week.
“UK May CPI is released next Wednesday and the sticky core services component (5.9% year-on-year in April) may well come down,” ING analysts stated. “That is why we are reluctant to chase the current rally in sterling and can probably see the top of this year’s range holding for GBP/USD at 1.2850/2900.”
BOJ Meeting Due
In Asia, USD/JPY traded 0.3% higher at 157.23, with traders now awaiting more policy cues from the Bank of Japan on Friday.
The central bank is likely to keep rates steady but is expected to reduce some of its bond purchases to tighten policy.
USD/CNY gained 0.2% to 7.2519, close to six-month highs, as reports of increased U.S. trade scrutiny against China affected sentiment towards the yuan this week.
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