Ankur Banerjee
SINGAPORE (Reuters) – Currency markets started the week cautiously, with the dollar slightly lower on Monday after data released last week showed U.S. inflation stabilised in April, leaving open the possibility that the Federal Reserve could cut interest rates this year.
The dollar recorded its first monthly decline this year in May, weighed down by changing expectations about when and how much the U.S. central bank will cut interest rates.
Markets are pricing in a 37 basis point rate cut from the Fed this year after data on Friday showed the personal consumption expenditures (PCE) price index rose 0.3% last month, in line with the unrevised rate increase in March.
Traders now rate the likelihood of a September rate cut at about 53%, down from about 49% before the report.
Inflation data shows price pressures remain above the Fed’s 2% target, with the year-on-year increase in the PCE index at 2.7% in April, the same as in March, leaving the market uncertain about whether one or more rate cuts will be made in 2024.
“If the Fed can cut rates because it can, not because it has to avoid a recession, that should do the market good,” said Brian Jacobsen, chief economist at Annex Wealth Management.
“The growth data suggests the Fed has waited too long to recalibrate interest rates, so markets will grow impatient with the Fed’s patience. The Fed seems ready to seize defeat at the doorstep of victory.”
The dollar index, which compares the U.S. currency against six major currencies, fell 0.067% to 104.51 on Monday. The index has fallen 1.56% in May.
The pound rose 0.04% to $1.27475, while the euro finished at $1.085325 ahead of Thursday’s European Central Bank policy meeting, where the ECB is almost certain to cut interest rates.
Pepperstone head of research Chris Weston said the market was expecting a relatively hawkish meeting and that the euro would react positively.
The ECB officials’ comments, along with economic forecasts, will be closely watched by traders as they wait to gauge whether the central bank will cut interest rates further after Thursday after data showed euro zone inflation rose in May.
Markets are pricing in a 57 basis point rate cut from the ECB this year.
Meanwhile, data released by Japan’s Finance Ministry on Friday confirmed that authorities had spent 9.79 trillion yen ($62.23 billion) intervening in foreign exchange markets to support the yen over the past month.
The data confirmed the suspicions of traders and analysts that Tokyo had intervened on two separate occasions to sell dollars on a large scale, first shortly after the yen hit a 34-year low of 160.245 yen to the dollar on April 29, and again in the early hours of the Tokyo morning on May 2.
In early morning trading on Monday, the yen closed at 157.15 yen to the dollar.
“The yen was the only G10 currency to fall against the US dollar on Friday night, which will likely catch the eye of Japan’s currency regulators,” said Tony Sycamore, market analyst at IG.
Sycamore said rising 10-year Treasury yields and previous failures of currency interventions will likely prompt authorities to seek new answers to rescue the yen.
(Reporting by Ankur Banerjee in Singapore; Editing by Jamie Freed)
