U.S. Dollar Retreats as Yields Fall Ahead of Key CPI Data and Fed Meeting
Dollar Retreats Ahead of CPI and Fed Meeting
The U.S. dollar pulled back on Tuesday, dropping from a one-month high as Treasury yields fell ahead of key U.S. inflation data and the latest Federal Reserve meeting. At 04:15 ET (08:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.3% at 104.795, having reached 105.39 on Monday, the highest level since May 14.
Impact of Jobs Report and Treasury Yields
The dollar had gained strength following Friday's stronger-than-expected jobs report, which supported higher Treasury yields as traders reduced their bets on Federal Reserve rate cuts this year. However, yields have since retreated, dragging the dollar lower as traders adopted a more cautious approach ahead of the release of crucial U.S. consumer price data and fresh Federal Reserve interest rate forecasts on Wednesday.
Expectations for Inflation and Federal Reserve Actions
The May Consumer Price Index (CPI) is expected to increase by just 0.1% on the month, marking an annual rise of 3.4%, which remains significantly above the Fed’s 2% medium-term target. Traders are still pricing in some monetary easing this year, with a reduction in September seen as a 50:50 possibility.
This inflation data is being released just before the Federal Reserve concludes its latest two-day policy-setting meeting, where no change in interest rates is almost certain. Traders will be keen to see if Fed officials adjust their expectations for the number of interest rate cuts this year, especially given their call for three reductions in their last forecast.
Analysts at ING noted, “We observe the dollar has ended lower on the day after the last four consecutive FOMC meetings – largely due to Chair Jerome Powell's dovish rhetoric at the press conference. We cannot rule out that happening again, given that market pricing of this year's Fed easing cycle remains on the low side.”
Euro Steadies After French Election Shock
EUR/USD traded largely flat at 1.0761, after dropping to 1.0733 on Monday, a level last seen on May 9, following the surprise announcement by French President Emmanuel Macron of a snap election after gains by the far right in the European Parliament elections. Analysts at ING commented, “Macron's government was already struggling with fiscal consolidation. The concern now is that any National Rally government will follow a Trump-esque approach to fiscal consolidation – i.e., trying to grow its way out of the problem.”
Sterling Faces Pressure After Labor Data
GBP/USD fell 0.1% to 1.2719 following the release of labor data showing a decline in U.K. employment. The U.K. unemployment rate rose to 4.4% in April from 4.3% the previous month, while the claimant count surged by over 50,000 in May, much higher than the expected 10,000. This could incentivize the Bank of England to consider cutting interest rates later this month. However, average earnings (including bonuses) rose by 5.9% in April, exceeding the expected 5.7%, indicating that wage-driven inflation remains a concern.
“Given the Bank Of England's lack of opportunities to communicate with the market because of the 4 July election, we will have to wait until the 20 June BoE rate meeting for major updates here,” ING analysts stated.
Bank of Japan Meeting and Asian Market Moves
In Asia, USD/JPY traded 0.2% higher at 157.32 ahead of a Bank of Japan meeting on Friday. Investors expect a reduction in the central bank's monthly government bond purchases, potentially as early as this meeting. Meanwhile, USD/CNY rose 0.1% to 7.2542, remaining close to six-month highs as traders remain concerned about an uneven economic recovery.
