By Wayne Cole
SYDNEY (Reuters) – The dollar was volatile on Tuesday as investors waited to see how U.S. economic data might affect the chances of a bigger interest rate cut, while gains in Japanese shares helped stem losses in the yen carry trade.
The dollar briefly hit a one-week high of 148.23 yen overnight before profit-taking, before stagnating at 147.17 yen.
The euro edged higher overnight, approaching resistance at $1.0944 and $1.0963 before settling at $1.0931. The dollar index was flat at 103.08.
The producer price index, due to be released later, will be an appetizer for Wednesday’s main inflation report and could move markets as it feeds into the Federal Reserve’s preferred measure of core personal consumption expenditures (PCE).
The headline PPI and core index are both expected to rise 0.2%.
More important will be the July consumer price report and retail sales, which could have a big impact on whether the Fed eases by 25 or 50 basis points in September.
Futures markets are currently divided on a big move, but last week when stock markets were plummeting, it was briefly priced in as an absolute certainty.
“A strong CPI and sales reading would be the most volatile scenario and would see the bond market quickly recalibrate to a 25bp cut,” JPMorgan analysts wrote in a note.
“Weaker CPI and sales figures could ease some concerns about stagflation risks but rekindle recession fears in the market,” the researchers added. “Bond markets may react quickly to the announcement and price in a September rate cut of 50 basis points or more.”
The former outcome is likely to push up Treasury yields and support the dollar, while the latter would have the opposite effect, especially as rumors of a recession tend to boost safe-haven currencies like the yen and Swiss franc.
Futures markets are pricing in 101 basis points of Fed easing by Christmas and over 120 basis points next year, making it clear that a recession is still seen as a risk.
This seems to contradict much of the economic data, including the Atlanta Fed’s GDPNow estimate of 2.9% annual growth.
“The annualized CPI rate is expected to be 3.0% y/y in July, with the core index at 3.2% y/y,” ANZ analysts wrote. “Despite easing trends, inflation is too high for the market to justify pricing in a 100bps Fed rate cut between September and the end of the year.”
“That would require a significant deterioration in the data or a stronger deflation process.”
(Reporting by Wayne Cole and Sam Holmes Editing)
