Dollar in holding pattern, inflation data provides little clarity on rates

U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration
U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

By Laura Matthews

NEW YORK (Reuters) – The dollar remained stable against a basket of currencies on Wednesday as data showed inflation slowed slightly more than expected last month but gave traders little clarity on the U.S. monetary policy outlook.

A U.S. Labor Department report on Wednesday showed the annual increase in consumer prices dipped below 5% in April for the first time in two years. An inflation measure closely watched by the Federal Reserve also subsided, which could provide an incentive for the central bank to pause further interest rate hikes next month. But with inflation still above the Fed’s 2% target, rates may need to stay high for some time to tame it.

“The market is of the view that the Fed will be cutting rates sooner and faster than most other central banks. The data are showing some tentative signs of validating those expectations of divergence, but are not clear in suggesting that even faster or deeper cuts are needed,” said Alvise Marino, macro trading strategist at Credit Suisse in New York. “When markets are looking for big things to happen, and the actual outcomes are not as shocking, the expectation of future volatility tends to fall.”

The dollar index in afternoon trading was at 101.48, up 0.1% after hitting a low of 101.21 earlier.

Read More: Dollar edges up as markets await debt-ceiling talks, inflation data

The euro was trading 0.15% higher at $1.0979 while sterling was flat at $1.2624 against the greenback.

The Japanese yen held to gains and was last seen at 134.25 as the dollar slipped 0.73%.

Fed funds futures traders are pricing in a pause before expected rate cuts in September. The Fed’s target range stands at 5% to 5.25%.

But Amo Sahota, director at Klarity FX in San Francisco, believes the near 80-basis-point cut that markets are pricing in by the end of this year “looks a little aggressive”.

“I think what the data does say is the Fed can afford to be on pause and not have to raise interest rates. I don’t think this is giving us the real green light to say that there will be aggressive rate cuts. We’ve got another inflation read before the next Fed meeting in June. So, that’s going to provide a better focal point going right into the meeting,” said Sahota.

Read More: US dollar edges higher as GDP, jobless claims affirm rate hike bets

The U.S. will report initial jobless claims and producer price data on Thursday, which could reinforce recent signs of a softening labour market and cooling inflationary pressures from wages.

And Sahota said the escalating U.S. debt-ceiling tension presents “a real danger that is not being priced in that aggressively in the marketplace.”

Meanwhile, in cryptocurrencies, bitcoin rose 0.24% to $27,730 after dipping almost 3% earlier in the session.


Currency bid prices at 3:30PM (1930 GMT)

       Description      RIC         Last           U.S. Close  Pct Change     YTD Pct       High Bid    Low Bid          

                                                   Previous                   Change                              


       Dollar index                 101.4100       101.6200    -0.20%         -2.010%       +101.8000   +101.2100          

       Euro/Dollar                  $1.0983        $1.0961     +0.21%         +2.51%        +$1.1007    +$1.0940          

       Dollar/Yen                   134.3100       135.2400    -0.69%         +2.44%        +135.4650   +134.1200          

       Euro/Yen                     147.51         148.21      -0.47%         +5.14%        +148.6700   +147.0500          

       Dollar/Swiss                 0.8891         0.8907      -0.17%         -3.84%        +0.8927     +0.8868          

       Sterling/Dollar              $1.2628        $1.2622     +0.06%         +4.44%        +$1.2680    +$1.2603          

       Dollar/Canadian              1.3373         1.3382      -0.06%         -1.30%        +1.3414     +1.3335          

       Aussie/Dollar                $0.6778        $0.6762     +0.27%         -0.54%        +$0.6818    +$0.6745          

       Euro/Swiss                   0.9764         0.9760      +0.04%         -1.32%        +0.9776     +0.9744          

       Euro/Sterling                0.8696         0.8687      +0.10%         -1.67%        +0.8700     +0.8673          

       NZ                           $0.6366        $0.6335     +0.46%         +0.23%        +$0.6381    +$0.6324          


       Dollar/Norway                10.5000        10.5610     -0.46%         +7.11%        +10.5750    +10.4460          

       Euro/Norway                  11.5278        11.5844     -0.49%         +9.85%        +11.6107    +11.4760          

       Dollar/Sweden                10.2220        10.2047     +0.42%         -1.79%        +10.2531    +10.1640          

       Euro/Sweden                  11.2285        11.1812     +0.42%         +0.71%        +11.2415    +11.1705          

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