Ankur Banerjee
SINGAPORE (Reuters) – The dollar was steady in early trade on Tuesday but the yen edged down from a one-month high as investors braced for U.S. inflation data and reassessed expectations of bigger interest rate cuts by the Federal Reserve starting next week.
Friday's labor report did not provide any clear justification for whether the Fed will deliver its usual 25 basis points (bps) rate cut at its Sept. 17-18 policy meeting or a larger cut of as much as 50 bps.
Traders are awaiting Wednesday's U.S. Consumer Price Index (CPI) report for further policy clues, but the Fed has made it clear that employment is being prioritised over inflation. A Reuters poll showed headline CPI was expected to rise 0.2% in August from the previous month, remaining flat from the previous month.
Economists at ING said markets were now looking to U.S. inflation data to gauge the pace of the Fed's rate cuts after non-farm payroll data fell short of justifying a 50 basis point cut.
“It's clear that economic growth is losing momentum and the market now seems to be looking at whether the economy will have a soft or hard landing.”
Investor attention will also be turned to the highly anticipated US presidential televised debate later on Tuesday, which could have a major impact on the November election.
The dollar rose 0.1 percent to 143.30 yen, gradually climbing from a one-month low of 141.75 yen hit on Friday. The pound was last trading at $1.3061 after hitting a nearly three-week low of $1.3058 earlier in the session.
An index comparing the U.S. dollar against six major currencies rose 0.4% to 101.69 on Monday after losing 0.5% last week as traders' expectations of a rate cut shifted.
According to the CME FedWatch tool, the market is now fully pricing in a 25 bps cut next week, with a 50 bps cut at 30%, down from a high of 50% on Friday.
A weaker-than-expected report could boost market expectations for a 50 basis point cut, but a flat report could leave the debate over 25 or 50 basis points unresolved, according to Charu Chanana, head of currency strategy at Saxo.
“Overall, current Fed easing expectations still seem excessive, so we expect the USD to trend flat to strengthen.”
For 2024, traders are expecting easing of around 100 basis points to 110 basis points over the remaining three meetings.
Fed policymakers last week signaled they were ready to begin a series of rate cuts, saying the labor market weakness risked worsening without a policy shift.
“This will likely lead the Fed to opt for a 25 basis point cut to avoid any signs of panic, but may keep the door open for more aggressive cuts later this year,” Saxo's Chanana said.
Meanwhile, the euro was little changed at $1.10305 after falling nearly 0.5 percent on Monday, ahead of the European Central Bank's (ECB) policy meeting on Thursday where the central bank is almost certain to cut interest rates again.
However, what will be of interest is the message from the central bank.
Elsewhere, the Australian dollar fell 0.13% to $0.6652, its lowest in more than three weeks at $0.66445, while the New Zealand dollar was down 0.19% to $0.6133, hovering near Monday's three-week lows. [AUD/]
