Dollar braces for inflation, rattled by debt ceiling impasse By Reuters

By Amanda Cooper

LONDON (Reuters) – The dollar swung on Wednesday after U.S. President Joe Biden and top lawmakers made no progress on the debt ceiling crisis, though swings were minimal ahead of inflation data that could be useful in determining the direction of interest rates.

Biden and House Speaker Kevin McCarthy remained divided over increasing the US debt limit of $31.4 trillion after talks on Tuesday, with just weeks left before the US is forced into an unprecedented default.

However, the two agreed to hold more talks and committed their aides to daily discussions. Biden, McCarthy and three top congressional leaders are scheduled to meet again on Friday.

The dollar retained most of its gains on Tuesday, thanks to a sharp rise in short-term Treasury yields and concern over US inflation data on Wednesday.

The euro last settled at $1.0957, as well as the British pound, which settled at $1.2628.

Against a basket of currencies, it settled at 101.64.

Economists polled by Reuters expected core consumer prices in the United States to rise 5.5% year-on-year for the month of April.

The stronger-than-expected reading could be a headache for the Federal Reserve, which last week opened the door to a pause in its aggressive tightening cycle, after raising interest rates 10 times in a row since March 2022.

“If there’s one piece of data that can change market thinking, it’s the CPI report,” said Derek Halpenny, head of research at MUFG.

“Certainly, if there are bullish surprises in today’s more volatile components, the reaction may be more muted than in previous CPI outbursts. Still, there should be a risk of

“More liquidation of meaningless euro/dollar longs.”

Speculators built the biggest bullish position on the euro in more than two years, according to weekly data from the CFTC.

At $23 billion, it’s nearly tripled in six months. But investors are already counting on the European Central Bank having more room to raise interest rates than the Fed, which could prompt some of the curtailment of those bullish bets.

Euro bulls go all out, https://www.reuters.com/graphics/CURRENCIES-SPECULATORS/zdpxdglldpx/chart.png

Money markets are pricing in a roughly 80% chance that the Federal Reserve will keep interest rates unchanged at its next meeting in June, and at least two rate cuts are expected to follow before the end of the year.

Growing expectations that the Federal Reserve will start cutting interest rates later this year has been driven by recent pressure in the banking sector after the collapse of the Silicon Valley Bank in March.

“The bar is high for the Fed’s response to data surprises in either direction,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank.

“Having finished raising interest rates by 500 basis points and anticipating some credit tightening from a shake-up among regional banks, the Fed is unlikely to tighten further than just ‘fixed’ inflation, instead requiring a re-acceleration of inflation.”

On the other hand, the Japanese yen settled against the dollar at 135.25 against the euro at 148.155, while the Australian dollar fell 0.1% to $0.6755.

Bank of Japan (BOJ) Governor Kazuo Ueda said on Wednesday that the central bank will discuss an exit strategy from ultra-loose monetary policy and communicate it to the public once it achieves stable and sustainable inflation target approaches.