Investing.com – The US dollar fell on Thursday as traders weighed the competing factors of benign US inflation and a more hawkish Federal Reserve.
At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was trading 0.3% lower at 104.340, after trading at its strongest level since mid-May earlier this week.
Dollar awaits PPI release
The dollar saw some volatile trading on Wednesday, falling in the immediate aftermath of the US inflation report, which was flat month-on-month in May despite market expectations of a 0.1% rise.
Before recouping some of these losses when the funds left rates at 5.25%-5.5%, we detailed that policymakers’ average forecast for the number of cuts this year fell from three in March to just one.
That said, “we continue to expect a first rate cut in September and a second cut in December,” Goldman economists said in a note.
This puts Thursday’s release firmly into focus, with the headline figure in May expected to show monthly growth of 0.1%, down from 0.5% growth the month before.
The release, which excludes volatile food and energy prices, is expected to show monthly growth of 0.3%, down from 0.5% growth the month before.
“A soft PPI reading today will raise expectations of a new ‘on-target’ 0.2% month-over-month core PCE reading and give both the Fed and the market some more confidence that the central bank will could possibly lower interest rates. finally,” ING analysts said in a note. “This is why we have a downward arrow on the dollar today.”
The euro strengthens after more inflation data
rose 0.1% to 1.0812 and continued to rise after rising 0.6% overnight as traders digested more regional inflation data.
fell 0.7% in May compared to the same month last year, while in May it rose 3.6% year-on-year.
“EUR/USD did well to spike to 1.0850 yesterday and likely argues we are in a wide trading range of 1.0720-1.0900 for the near term,” ING said.
“Here the two opposing forces will be softer US price and activity data, potentially dragging down the dollar complex against French political risk, where a further risk premium could still be built into the euro.”
fell 0.1% to 1.2790, after rising 0.5% overnight to $1.2798 following the release of US inflation data, while Britain will report its monthly CPI figures next week announced.
“The UK May CPI will be released next Wednesday and the core services component (5.9% annualized in April) could well decline,” ING said. “That is why we are reluctant to chase the current rally in sterling and are likely to see this year’s top for GBP/USD at 1.2850/2900.”
BOJ meeting scheduled
In Asia, trading traded 0.3% higher at 157.23, with traders now awaiting more policy guidance from Friday.
The central bank is likely to keep interest rates steady, but is expected to scale back some of its bond purchases in an effort to tighten policy.
rose 0.2% to 7.2519, near a six-month high, after reports of more U.S. trade scrutiny into China dented sentiment toward the yuan this week.
