Dollar loiters off highs as traders eye CPI

Dollar loiters off highs as traders eye CPI

An upside CPI surprise could drive yields and the dollar higher. — Reuters pic

Tuesday, 09 Aug 2022 12:20 PM MYT

SINGAPORE, Aug 9 — The dollar lurked just below recent highs today as traders waited for US inflation data due later in the week, which could take pressure off the Federal Reserve and put it on the greenback if it suggests the pace of price rises has peaked.

The data is due tomorrow and the anticipation is likely to keep things calm until then.

The Australian and New Zealand dollars rose overnight and were steady in the pre-CPI calm in Asia. The Aussie held gains at US$0.6977 (RM3.11). The kiwi did likewise at US$0.6276, leaving both just above their 50-day moving averages.

Sterling held at US$1.2081 and the euro was stuck just above parity at US$1.0189, with the continent’s energy crisis meaning it may miss out on a boost if the dollar weakened. The yen rose slightly to 134.75 per dollar.

Today, a New York Fed survey showed consumers’ inflation expectations fell sharply in July, perhaps easing some of the upward pressure on rates from last week’s strong jobs figures.

“Expectations that the Fed may announce another 75 basis point rate hike on September 21 have risen on the back of (Friday’s) strong US July payrolls report,” said Jane Foley, senior currency strategist at Rabobank.

“Later this week, the July US CPI inflation release is expected to show some moderation in inflation pressures,” she said. “This may now be sufficient for the Fed to relax.” Economists polled by Reuters see year-on-year headline inflation at 8.7 per cent — incredibly high, but below last month’s 9.1 per cent figure.

Money-market futures show traders see about a two-thirds chance of a 75 bp hike next month and have started pushing expectations for rate cuts back, deeper into 2023.

Two-year Treasury yields, which track short-term US rate expectations, held at 3.2157 per cent today, with benchmark 10-year yields 45 bps below that at 2.7572 per cent.

An upside CPI surprise could drive yields and the dollar higher.

“Investors have become increasingly sure in their view that inflation will drop back fairly quickly, and that it will subsequently remain around the Fed’s target,” said Thomas Mathews of Capital Economics.

“The market is arguably quite vulnerable to a surprise on inflation, should any evidence gather it is staying high longer than expected. That would also probably prompt a sharper response from the Fed, and see the bond market selloff resume in earnest.” — Reuters