Dollar strengthens on muted inflation data, dampening expectations for significant Fed rate cut
The dollar was trading near a four-week high against the euro on Thursday, supported by signs of resilient U.S. Inflation that reinforced expectations of a smaller interest rate cut by the Federal Reserve next week. In contrast, the European Central bank (ECB) is expected to announce a quarter-point rate reduction later in the day, with investors eagerly awaiting guidance on future cuts.
Following a volatile session on Wednesday, the dollar gained ground against the yen after the release of U.S. consumer price data. Bank of Japan officials also indicated a bias towards tightening monetary policy. The consumer price index (CPI) in the U.S. rose 0.2% last month, matching the previous month’s increase. Excluding food and energy, the gauge climbed 0.3%, indicating accelerated Inflation.
As a result, the likelihood of a 50-basis point rate cut next week has decreased, with markets now pricing in an 85% probability of a 25-bp reduction. However, expectations for additional cuts by the end of the year remain high, with a 50-bp cut anticipated at either the November or December meeting.
The dollar strengthened to 142.905 yen, rebounding from a low of 140.71 on Wednesday. The pair is expected to recover towards 145.50, according to analysts. U.S. long-term Treasury yields, which influence the dollar-yen pair, also bounced back after hitting a 15-month low.
The euro dipped to $1.1007, close to its lowest level since August 16. The ECB has already lowered its deposit rate to 3.75% and is considering further cuts to borrowing costs in upcoming meetings. Sterling and the Swiss franc also experienced downward pressure against the dollar.
Overall, market sentiment remains cautious ahead of key Central bank meetings and economic data releases, which will continue to drive currency movements in the coming days.
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Emma Collins, graduated in Financial Economics from the University of Chicago in the USA in 2016. She has since worked at an asset management firm in New York, where she specializes in investment strategies and portfolio management. Emma has a keen interest in financial analysis and has published several articles in renowned financial journals. Her work focuses on providing actionable insights to investors, and she is known for her forward-thinking approach to managing financial portfolios.