The U.S. dollar remained relatively stable on Tuesday, as traders awaited the release of crucial inflation data that could influence the trajectory of interest rates. The Dollar Index, which measures the dollar against a basket of other major currencies, inched up by 0.1% to 105.250 during early trading hours. Market participants are eagerly anticipating the April producer prices index report later in the day, with the focus shifting to Wednesday’s release of the Consumer Price Index (CPI) data. Analysts project a modest 0.3% month-on-month increase in core CPI for April, a slight dip from the 0.4% uptick recorded in the previous month.
With the Federal Reserve stressing that any potential rate adjustments will hinge on economic indicators, investors are closely monitoring the inflation readings. Presently, the market has factored in a mere 42 basis points of rate cuts for the year, with a 60% probability of a cut in September, as per the CME FedWatch tool. However, a higher-than-anticipated inflation figure could dampen expectations for further rate cuts in 2019. The sentiment in the FX market remains subdued, as traders await more clarity on the rate cut scenario following the release of inflation data.
Meanwhile, in Europe, the GBP/USD pair dipped by 0.3% to 1.2523 after the release of the latest U.K. jobs report, indicating a rise in the country’s unemployment rate to 4.3%. This development has fueled speculation about potential rate cuts by the Bank of England, although the situation is complicated by the robust wage growth in the UK. Average wage growth, excluding bonuses, held steady at 6%, surpassing expectations and outpacing inflation. This mixed economic data presents a challenge for the Bank of England in determining its future monetary policy direction.
In the eurozone, the EUR/USD pair registered a marginal 0.1% decline to 1.0778 following the release of the German consumer price index data, which indicated stable inflation levels in the region’s largest economy. The annual German CPI rose by 2.2% in April, slightly exceeding the European Central Bank’s medium-term target of 2%. Market forecasts suggest that the ECB could initiate interest rate cuts starting from June, with expectations running high for up to three rate reductions in 2019, potentially in September and December.
In Asia, the USD/JPY pair advanced by 0.2% to 156.44, rebounding from losses incurred earlier in May when the Japanese government intervened in the currency markets. Traders have identified the 160 level as a critical threshold for potential government interference. Despite the intervention threats, the rapid appreciation of USDJPY has raised concerns about the government’s readiness to step in sooner than anticipated. Market participants are closely monitoring these developments for any signs of further government intervention and its potential impact on currency markets.