May 16 2024: The U.S. dollar stabilized in European trade on Thursday, recovering slightly after dropping to multi-week lows overnight following a softer U.S. inflation report, which rekindled hopes for Federal Reserve rate cuts.
At 04:25 ET (08:25 GMT), the Dollar Index, which measures the greenback against a basket of six major currencies, was up 0.1% at 104.285, after hitting a five-week low just below 104.
Dollar on the Back Foot After Key Inflation Data
The dollar remained pressured after the latest U.S. inflation data heightened expectations that the Federal Reserve would implement two interest rate cuts this year, potentially starting in September.
Wednesday’s consumer price index (CPI) data showed a 0.3% increase in April, below the anticipated 0.4% rise, alleviating market concerns after persistent inflation in the first quarter had reduced rate cut bets and raised fears of an additional hike.
The data also led to U.S. Treasury yields hitting six-week lows as traders reassessed the Fed’s monetary policy trajectory.
“Markets have reacted positively to the encouraging news from two days of inflation data, almost completely erasing the dollar’s gains from the mid-April CPI disappointment,” ING analysts noted in a report.
Several Federal Reserve officials are set to speak later in the session, but substantial evidence will be needed to significantly alter rate cut expectations. “Our current expectation is for a period of quiet trading with low volatility rather than a continued dollar decline until the end of May. Significant data, such as the core PCE release on May 31, is needed to substantially influence Fed pricing,” ING added.
Euro Retreats from Earlier Highs
In Europe, EUR/USD fell 0.1% to 1.0867, with the euro pulling back slightly after reaching its highest level since March 21 earlier in the session.
The European Central Bank (ECB) is widely expected to begin cutting interest rates from a record high in June, with markets anticipating up to three rate cuts this year, most likely in September and December.
“The 1.0900 level should not pose a strong resistance if U.S. data, such as jobless claims, increases pressure on the dollar. However, a move to the 1.1000 benchmark level seems premature given the still persistent inflation in the U.S.,” ING stated.
GBP/USD dropped 0.1% to 1.2675, with the pound giving back some of its gains from the previous session when it surpassed 1.27 for the first time since April 10.
The Bank of England is also expected to cut rates from a 16-year high this summer, but stronger-than-expected GDP growth could delay this move until after the ECB acts.
Yen Posts Minor Gains After Weak GDP Data
In Asia, USD/JPY fell 0.2% to 154.64, with the yen benefiting from the dollar’s weakness. However, the pair remained well above early May levels when government intervention in currency markets was suspected. The yen’s recovery was stalled by GDP data showing a larger-than-expected contraction in Japan’s economy in the first quarter, casting doubt on the Bank of Japan’s ability to continue raising interest rates.
USD/CNY remained largely unchanged at 7.2187, as sentiment towards China remained weak following Washington’s imposition of stricter trade tariffs on key Chinese industries, including electric vehicles, medicines, and solar technology.