The U.S. dollar traded within a narrow range as traders awaited the July Producer Price Index (PPI) data, the first of the week’s inflation data, as a roadmap for future monetary policy decisions by the Federal Reserve.
Dollar Awaits PPI Data
The Producer Price Index, which measures changes in producer prices, is expected to rise 0.2% month-over-month in July, which would mean an annual increase of 2.3%, down from 2.6% last month.
The underlying figure, which excludes volatile components such as food and energy, is also expected to rise by 0.2% on a monthly basis, down from 0.4% in June, with an annual increase of 2.7%, down from 3.0%.
Analysts expect a consensus figure of 0.2% month-on-month for both the core and underlying measures, which could ease market jitters about potential CPI/PCE hikes that might otherwise harm risk sentiment, just as global stock indices recover from recent losses.
On Wednesday, Consumer Price Index (CPI) data will be released, which is also expected to indicate a slight cooling of inflation in July.
Investors will scrutinize the data to determine whether the Fed will implement a 50 basis point or a 25 basis point cut at its September meeting. According to CME’s FedWatch tool, traders are evenly split between the two options.
At the end of last month, the Fed kept the policy rate in the same 5.25%-5.50% range where it has been for more than a year, although it indicated that a rate cut could be generated in September if inflation continues to cool.
Pound Rises on Wage Growth
Turning to Europe, GBP/USD rose 0.3% to 1.2801 following the release of data showing that UK wage growth excluding bonuses rose by around 5.4% in June.
Although this figure is a fall from the revised 5.8% last month, it is still above the estimated 4.6% growth and signals that the Bank of England will struggle if it wants to curb inflation completely.
Additionally, UK grocery inflation rose for the first time since March last year, with market researcher Kantar reporting that annual grocery price inflation was 1.8% in the four weeks to August 4, up from 1.6% in the previous four-week period.
EUR/USD fell about 0.1% to 1.0922, with the euro losing slightly after consumer prices in Spain fell 0.5% in July, resulting in a 2.8% annual rise.
The European Central Bank began cutting interest rates in June, and many expect policymakers to agree to another reduction in September, particularly as inflation shows signs of dissipating.
Yen Loses Ground
Turning to Asia, USD/JPY rose 0.4% to 147.81, with the yen losing ground on a Reuters report that the Japanese parliament is planning to hold a special session on August 23 to discuss the central bank’s decision last month to raise interest rates.
Last week, the yen strengthened to near the 141 level on increased safe-haven demand and a reversal of carry trades, although doubts remain about the Bank of Japan’s room for further rate hikes in 2024.
USD/CNY fell about 0.1% to 7.1704, with industrial production data and retail sales expected later this week.
