Changing expectations of when and how quickly central banks will cut interest rates as inflation drops are a significant driver of currency markets at present
The dollar was steady on Monday as a holiday in most major Asian markets subdued the start of what could turn into a busy week, with all eyes on U.S. inflation data for hints on when the Fed may start to cut rates.
The euro was down slightly at $1.0778, dropping from a 10-day high hit in early trading after the past week saw a small bounce back following steady declines this year. A reading of the euro zone’s economic growth in the fourth quarter on Wednesday could offer fresh direction.
The pound was flat at $1.2632, though the Japanese yen firmed a fraction to 149.04 per dollar as the approaching release of U.S. consumer price index data for January on Tuesday capped moves.
Changing expectations of when and how quickly central banks will cut interest rates as inflation drops are a significant driver of currency markets at present.
Strong jobs data earlier this month has largely taken a March Fed rate cut off the table, with markets currently seeing a move in May as more likely than not.
Analysts expect U.S. core CPI to come in at 0.3% month on month in January, but a still 3.8% higher year-on- year.
Fed rates setters are saying they want more evidence that inflation will stay near the 2% target before considering a cut, said Carol Kong, currency strategist at Commonwealth Bank of Australia.
Persistently near-target inflation and/or a weakening labour market would give them that evidence, she said, adding that Tuesday’s data is unlikely to be sufficient to cause a large drop in the dollar.
On Wednesday, a reading of British CPI inflation will similarly influence opinion on when the BoE will start to cut interest rates – it is currently seen lagging the Fed and ECB.
Markets are also keeping an eye on the highly rate-sensitive Japanese yen, which firmed sharply late last year as markets priced in early U.S. rate cuts, but has since softened as that timing got pushed back.