Feb 26 2024: The dollar asserted its strength on Monday in anticipation of a busy week packed with significant economic releases, offering insights into the global interest rate outlook, with particular attention on an upcoming U.S. inflation report.
The core Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s favored gauge of inflation, is set for release on Thursday, with expectations pinned on a 0.4% increase on a monthly basis.
This week’s data calendar also includes inflation figures from the euro zone, Japan, and Australia, alongside a rate decision from the Reserve Bank of New Zealand (RBNZ) and Purchasing Managers’ Index (PMI) readings from China.
Ahead of these releases, the greenback edged higher, prompting the Australian dollar to decline by 0.16% to $0.6553, while the New Zealand dollar dropped by 0.5% to $0.6167.
Despite a 1.2% rise last week, propelled by broad dollar weakness and expectations of a potential rate hike from the RBNZ on Wednesday, most economists anticipate the central bank to maintain rates at their current level.
“I think the RBNZ will keep the OCR (official cash rate) unchanged, likely causing the kiwi to fall if markets unwind pricing for a near-term rate hike,” commented Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY) (CBA). “But any declines in the kiwi are expected to be minimal because we anticipate the RBNZ to remain relatively hawkish.”
Sterling experienced a 0.03% decline to $1.26675, while the euro saw a slight 0.02% increase to $1.0823.
In terms of inflation dynamics, Japan’s nationwide consumer prices, expected on Tuesday, are forecasted to reveal a slowdown in core inflation to an annual rate of 1.8% in January, the lowest since March 2022. This presents a challenge to the Bank of Japan’s plans to cease negative interest rates in the coming months, exerting pressure on the yen in the short term.
The yen was marginally higher at 150.47 per dollar, having already depreciated by over 6% against the greenback this year due to the substantial interest rate differential between the U.S. and Japan.
“With the focus on the BOJ’s March or April policy meetings as potential endpoints for the BOJ’s negative interest rate policy since the end of last year, news of Japan’s technical recession in H2 2023 dampens market enthusiasm regarding the pace of monetary tightening from the BOJ,” remarked Jane Foley, head of FX strategy at Rabobank.
Moreover, recent U.S. producer prices and consumer prices exceeding expectations have skewed risks to Thursday’s core PCE price index data towards the upside, further delaying expectations for numerous Fed rate cuts this year.
Market expectations currently indicate only about a 20% likelihood of the Fed initiating rate cuts in May, compared to nearly 90% a month ago, as per the CME FedWatch tool.
“If anything, the (data) might surpass market expectations, giving a modest boost to the dollar,” suggested CBA’s Kong. “However, any gains in the dollar are expected to be modest. Market sentiment doesn’t appear to anticipate another rate hike from the FOMC.”
The dollar index remained steady at 103.95.
