Dollar remains steady ahead of US inflation report

The dollar remained steady against major currencies on Monday as markets awaited US inflation data that could influence the Federal Reserve's decision-making on potential rate cuts in 2024.

Following unexpectedly weak US labor market data and comments from the Federal Reserve ruling out interest rate hikes, traders have increasingly bet on monetary easing later this year.

Market predictions suggest an 80% probability of a Federal Reserve rate cut by the September meeting, with expectations for a total reduction of about 40 basis points in 2024, according to LSEG data cited by Reuters on Monday.

Markets.com Chief Market Analyst Neil Wilson weighed in on the upcoming reading in his morning note earlier today: 

“The data for April will be crucial to how markets see the Fed progressing. Goods inflation is expected to decline a bit, but core services inflation will likely remain a little too hot for the Fed’s liking. CPI for April is seen at +0.3% month-on-month, ticking down to 3.4% YoY. Despite the resilience of US inflation, the message from the Fed remains one of easing to come – cuts are in the mail”.

Fed officials last week presented mixed opinions, debating whether the current interest rates were high enough to keep price rises at bay. A recent surge in consumer inflation expectations, noted in a Friday survey, could further complicate the conversation.

PPI on Tuesday to be followed by Wednesday’s US inflation print

Investors, noting a slight deceleration in the US economy from the strong growth in 2023, are keen to confirm how sticky US inflation is — and how the April reading will affect Fed policy going forward. Opportunities to assess this will come this week with the release of the U.S. producer price index (PPI) on Tuesday and the consumer price index (CPI) on Wednesday.

ING FX analyst Francesco Pesole told Reuters: 

"CPI is such a big, polarising event for the whole market. It's a possibility going into the event for the market to hold dollars given the recent tendency for inflation data to surprise to the upside”.

The dollar index (DXY), which tracks the US currency against a basket of six major peers, recorded a minimal change at 105.18, dipping by 0.11% at the time of writing at 12:10 GMT on May 13.

The euro saw a minor increase to $1.0780, while the British pound rose slightly to $1.2537 ahead of Tuesday's labour market data.

Japanese yen jitters

Attention also remains on the Japanese yen, particularly with ongoing concerns about potential currency intervention by Japanese authorities, as markets prepare for the US inflation data release this week.

ING’s Francesco Pesole added:

"There's a chance that if we see another strong US CPI print that Japan will need to deploy another big amount for FX intervention”.

After a significant 3% drop earlier in the month, USD has rebounded slightly against JPY following two instances of suspected market intervention by Japan to strengthen its currency, causing temporary caution among short-sellers in the Japanese yen.

Reuters cited CFTC data showing a significant drop in non-commercial short positions against the yen, reaching levels not seen since June 2007.

At the time of writing, USD to JPY traded around 155.84, with the dollar approaching its recent high of 155.965 yen.

Earlier today, the yen received brief support after the Bank of Japan made a hawkish move by reducing the amount offered for a segment of Japanese government bonds during the morning trading session in Asia.