Dollar ebbs as markets await key global inflation reports

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The dollar weakened on Tuesday as risk appetite increased slightly, but it remained stable against other currencies as investors awaited key inflation data from major economies. This data is expected to provide guidance on the global interest rate outlook. Currency movements were relatively calm in early Asian trading hours, following a quiet overnight session due to holidays in the UK and US. Despite some dovish comments from European Central Bank policymakers and stagnant German business morale, the euro gained slightly against the dollar. Market participants will closely monitor German inflation data on Wednesday and the euro zone bloc’s reading on Friday for confirmation of an expected ECB rate cut next week, as well as any indications of further easing measures from the central bank.
According to Rodrigo Catril, senior FX strategist at National Australia Bank (NAB), the European Central Bank (ECB) is preparing for rate cuts next week. However, the lack of guidance from ECB speakers is concerning. The focus is on what happens beyond the rate cuts and how inflation dynamics will impact future expectations.

Currently, the Sterling is holding near a two-month high, trading at $1.2774, while the New Zealand dollar has risen slightly to reach $0.6155, its strongest level since mid-March.

In Australia, the Aussie has inched up 0.03% to $0.6657, with the release of the country’s monthly consumer price index data scheduled for Wednesday.

Nevertheless, the main event for the market will be on Friday with the release of the U.S. core personal consumption expenditures (PCE) price index report. This report is the Federal Reserve’s preferred measure of inflation, and it is expected to remain steady on a monthly basis.
Over the past few years, the direction of U.S. interest rates has been the main factor influencing currency movements. However, recent economic data from the largest global economy has been mixed, causing uncertainty among policymakers about the timing and extent of expected rate cuts this year.

According to NAB’s Catril, the market is already anticipating positive economic data, and it is crucial for this expectation to be met in order for current expectations of rate cuts by the Federal Reserve to be maintained. Any data that surprises on the upside is expected to lead to a significant increase in U.S. yields and a stronger dollar.

The dollar slightly declined by 0.01% against a basket of currencies, reaching 104.55. Meanwhile, the yen remained weak against the dollar, hovering around the 157 level and last trading at 156.87 per dollar. Despite this weakness, the yen is on track to experience its first monthly gain since 2024, thanks to suspected intervention by Japanese authorities in late April and early May.
On Friday, we can expect to receive Tokyo inflation data, which serves as a reliable indicator for the entire country. This data will offer valuable insights into the potential timing of future interest rate hikes by the Bank of Japan (BOJ).

Governor Kazuo Ueda of the BOJ emphasized on Monday that the central bank will approach inflation-targeting frameworks with caution. He acknowledged the unique challenges that Japan faces due to the prolonged period of ultra-easy monetary policy.

Turning to the cryptocurrency market, bitcoin experienced a slight decline of 0.47% and is now priced at $69,255. Similarly, ether saw a decrease of 0.2% and is currently valued at $3,882.20.