Written by Harry Robertson and Tom Westbrook
LONDON/SINGAPORE (Reuters) – The Australian dollar rose after a surprise jump in inflation on Wednesday raised the prospect of another interest rate hike, while the U.S. dollar maintained downward pressure on the Japanese yen.
Moves elsewhere in the market were relatively muted as investors awaited the release of the Federal Reserve’s preferred inflation gauge on Friday.
Australian inflation accelerated to a six-month high of 4% in May, sending traders scrambling to estimate a 70% chance of another rate hike by November and pushing the dollar up 0.46% to US$0.6679. (Australian dollar/)
Derek Halfpenny, currency strategist at the Japanese bank MUFG, said: “Today’s inflation data from Australia will be very worrying for the Reserve Bank of Australia and could tilt the decision in favor of raising rates when it meets on August 6.”
A similar surprise in Canadian inflation had the Canadian dollar briefly rising to a three-week high as investors backed away from expectations of further cuts. (Scoundrel/)
Elsewhere, the euro fell 0.16% to $1.0698 after a European Central Bank policymaker spoke of the chances of further interest rate cuts this year, a stance markedly different from that of the Fed’s Michael Bowman.
Olli Rehn, a member of the European Central Bank’s Governing Council, told Bloomberg that two additional cuts this year seemed “reasonable.” This contradicts statements by Fed Governor Bowman, who said she does not expect any cuts in US interest rates this year.
Francesco Besol, FX strategist at ING, said political risks from the French parliamentary elections were at the forefront of investors’ minds.
He said, “The movement of the euro price against the US dollar until the end of the week will be determined by the situation of the French elections and inflation data in the United States on Friday.”
The index, which measures the currency’s performance against six other currencies, rose 0.1% to 105.78, its highest level in two months.
The dollar’s rise hurt the Japanese yen, with the US currency rising 0.14 percent to 159.895 yen. The move kept traders alert to signs of intervention, as it was just a small step from where Japanese authorities intervened to buy the yen in April.
The pound sterling fell by 0.14% to $1.2669, with little movement reflecting weak trade ahead of the release of US data. Citi said this week that its traders found interbank forex trading volumes about 40% below the 30-day average.
Analysts expect US data released on Friday to show PCE inflation slowed to 2.6% in May, its lowest level in more than three years, down from 2.7% in April.
The yuan has also come under pressure from the dollar’s stubborn strength, with China appearing to signal some tolerance for a cheaper currency by gradually weakening the midpoint of the yuan’s daily trading range over the dollar.
The Chinese yuan, which has remained at a seven-month low against the US dollar, fell on Wednesday to 7.2670 yuan to the dollar.