Dollar steadies before inflation test; yen brushes off Tokyo CPI

The dollar weakened against other currencies on Friday following a downward revision of the U.S. GDP for the first quarter, indicating a potential for rate cuts. Investors are also preparing for inflation data. The latest official data showed that the U.S. economy grew at a rate of 1.3% from January to March, lower than the initial estimate of 1.6%, due to revisions in consumer spending. As a result, U.S. Treasury yields, which had driven the dollar to its highest level since May 14, declined. The dollar index, which measures the currency against six major peers, stabilized around 104.82 after dropping to 104.63 overnight.
According to Matt Simpson, senior market analyst at City Index, the recent data revisions and comments by New York Fed President John Williams about the effectiveness of monetary policy in reducing inflation have renewed hopes for an earlier rate cut. The market is now pricing in a 55% chance of rate cuts starting in September, up from 51% the previous day, according to the CME Group’s FedWatch Tool. Investors are now awaiting the release of the Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, for further insights into the central bank’s potential interest rate cuts later this year. The weaker U.S. consumer price inflation data in May has also fueled expectations of rate cuts, leading to a broad-based weakening of the dollar and putting it on track for its first monthly losses in 2024.
However, the anticipated interest rate cuts for this year have become uncertain due to signs of persistent inflation. This uncertainty was highlighted by a surprising increase in consumer sentiment data on Tuesday.

City Index’s Simpson stated, “The direction of the market now depends on today’s PCE inflation report… I still believe that there might be an unexpected positive outcome in the PCE report, which could quickly reverse Thursday’s market movements.”

The yen remained steady around 156.72 against the US dollar, staying above Wednesday’s four-week low of 157.715 per dollar.

On Friday, data revealed that core consumer inflation in Tokyo accelerated in May, but price growth, excluding the impact of fuel, slowed down. This has created uncertainty regarding the timing of the central bank’s next interest rate hike.

Marcel Thieliant, Head of Asia-Pacific at Capital Economics, noted, “The increase in inflation in Tokyo in May is mainly driven by rising electricity costs, which still have room for further growth. However, underlying inflation will continue to decrease.”
After analyzing the Tokyo CPI data, we are confident that nationwide underlying inflation will drop below 2% by July.

Over the past month, the yen has been steadily weakening, approaching its lowest level in 34 years at 160.245. Market players suspect that this decline triggered two rounds of intervention by Tokyo, and official figures on currency intervention from Japan’s Ministry of Finance will be released in the Asian evening, which may confirm these suspicions.

In the Asian morning, Japan’s finance minister reiterated warnings about excessive currency movements.

Meanwhile, the offshore Chinese yuan saw a 0.08% increase against the US dollar, reaching 7.2490, as traders processed the official factory survey indicating a decline in China’s manufacturing activity in May. This unexpected contraction has renewed calls for additional stimulus measures, as the ongoing property crisis continues to weigh on businesses, consumers, and investors.

In other news, the euro experienced a slight decline of 0.1% against the dollar, reaching $1.082225, after hitting a two-week low of $1.07885 overnight.
The euro zone is set to release its price data on Friday, following a surprising increase in April inflation figures for Germany earlier this week.

As of today, the British pound is trading at $1.2725, marking a 0.06% decrease from the previous day’s rate. On Tuesday, it briefly reached $1.2801, the highest level since March 21.

In the world of cryptocurrencies, bitcoin has experienced a slight 0.23% drop, currently standing at $68,313.58.