The U.S. dollar retreated on Tuesday from a one-month high as yields fell ahead of key inflation data and the latest Federal Reserve meeting.
Dollar retreats ahead of CPI and Fed meeting
The dollar was buoyed by Friday’s better-than-expected jobs report and rising Treasury yields as traders lowered estimates for rate cuts by the Federal Reserve this year.
However, yields lost ground on Tuesday, dragging the dollar lower as traders took a more cautious stance ahead of the release of crucial data on U.S. consumer prices and the Fed’s new interest rate estimates on Wednesday.
CPI for May is expected to increase by just 0.1%, indicating an annual increase of 3.4%, a number still well above the Fed’s medium-term target of 2%.
Market traders continue to bet on monetary easing by 2024, with a reduction in September estimated at close to 50%.
This inflation data will be released before the Federal Reserve concludes its two-day policy meeting, where there is a high likelihood that there will be no change in interest rates.
Traders will be watching closely to see if Fed officials change their estimates for the number of interest rate cuts this year, as their last forecast called for three reductions.
Euro stabilizes after French election surprise
The EUR/USD was trading flat around 1.0761 after falling to 1.0733 on Monday, its lowest level since May 9, following news that French President Emmanuel Macron called for an early election after far-right gains in the European Parliament elections.
Macron’s government was already struggling with fiscal consolidation, and the concern right now is that any National Rally government will follow a Trump-like approach to fiscal consolidation, i.e. trying to grow its way out of the problem.
GBP/USD was down about 0.1% at 1.2719 after data showed a decline in U.K. employment.
The U.K. unemployment rate rose to 4.4% in April from 4.3% last month, while the number of job seekers surpassed 50,000 in May, far more than the estimated 10,000.
This could prompt the Bank of England to consider cutting interest rates later this month, although average earnings rose 5.9% in April, up from an estimated 5.7%, indicating that wage-led inflation remains a problem.
Will the Bank of Japan taper its bond purchases?
USD/JPY rose 0.2% in Asia to 157.32 ahead of the Bank of Japan’s meeting on Friday.
A cut in the central bank’s monthly bond purchases is expected, which could come as early as this meeting.
USD/CNY rose 0.1% to 7.2542, hovering near six-month highs, amid traders’ concerns about an uneven economic recovery.
