Dollar steady as US inflation data takes spotlight By Reuters

Written by Brigid Riley

TOKYO (Reuters) – The dollar firmed against its major counterparts on Monday as market participants looked ahead to U.S. inflation data to assess the prospects of an interest rate cut this year.

Following a weaker-than-expected US jobs report for April and a dovish-sounding Federal Reserve policy announcement earlier this month, expectations have increased for interest rate cuts this year.

CME's FedWatch tool showed that markets expect a 61.2% chance of some rate cuts at the Fed's September meeting, with around 50 basis points of cuts expected in total.

But comments made by Fed officials last week were varied as speakers debated whether interest rates were high enough. The jump in consumer inflation expectations, revealed in Friday's poll, may further complicate the conversation.

With recent data indicating a slowdown in the economy, investors are looking to confirm the stability of inflation.

The market will have an opportunity this week, with inflation readings in the form of the Producer Price Index (PPI) on Tuesday followed by the Consumer Price Index (CPI) on Wednesday.

“For the wheels to really fall off the US dollar, the incoming data must point to a decline in inflation, not just pockets of weakness here and there,” said Matt Simpson, chief market analyst at City Index.

“If inflation data picks up again this month, it will almost certainly negate the impact of weaker growth and slightly weaker employment numbers.”

The index, which measures the US currency against a basket of currencies, settled at 105.31, after its first weekly gain last week after two consecutive weeks of decline.

This week's CPI will be crucial to the Federal Open Market Committee's (FOMC) decision to start easing interest rates in September, said Carol Kong, currency analyst at Commonwealth Bank of Australia (OTC:).

“If we get a strong CPI this week, we will leave the FOMC with four more monthly CPI reports before its September meeting. I don't think four benign CPI readings will give the FOMC enough confidence to start cutting interest rates in September.” “

Federal Reserve Chairman Jerome Powell will appear on Tuesday at a meeting of the Foreign Bankers Association in Amsterdam.

Intervention tension

As markets look this week to the US CPI, the yen will not be far from traders' minds amid the continued risk of Japanese authorities intervention in the currency.

Against the yen, the dollar settled at 155.80 after touching its highest levels since May 2 at 155.965.

The dollar rose against the yen after a 3% decline at the beginning of the month, the largest weekly percentage decline since early December 2022, following two suspected interventions.

These spikes in yen strength appear to have spooked some yen traders, at least for now.

Non-commercial short positions fell sharply from 179,919 contracts on April 23, the most since June 2007, yen futures data from the Commodity Futures Trading Commission (CFTC) showed.

The currency received some support on Monday after the Bank of Japan sent a hawkish signal by reducing the amount of its offer for a tranche of Japanese government bonds in the Asian morning.

The euro was little changed at $1.07695 as the euro zone prepares for its inflation reading on Friday.

The pound sterling settled at $1.2522.

The Chinese index fell 0.1% to 7.2414 while falling to its lowest levels since April 30 at 7.2385, as traders awaited an announcement from the United States about new tariffs on China.

Meanwhile, China's central bank said over the weekend that new bank lending fell more than expected in April, and that broad credit growth reached a record low.

Separate data on Saturday showed Chinese consumer prices rose in April while producer prices continued to decline.

The central bank pledged to support economic recovery.

In cryptocurrencies, Bitcoin rose in the latest trading by 0.68% to $60,889.51.