The pound steadied after rising on data showing UK inflation fell in April, but the dollar strengthened on Wednesday as investors awaited the Federal Reserve meeting minutes for clues about the central bank's interest rate path.
After a lower-than-expected inflation reading last week, investors have been increasing their bets on a U.S. rate cut even as Fed officials have continued to sound cautious.
On Tuesday, Fed Governor Christopher Waller stated that before he could support rate reductions, he would need to see several more months of positive inflation data.
Cleveland Fed President Loretta Mester echoed that timeline.
Joshua Mahony, chief market analyst at Scope Markets, stated that today's FOMC minutes offer key insights into the Fed's thinking earlier in the month, with traders eager to determine the likelihood of the anticipated September rate cut.
Today’s FOMC (Federal Open Market Committee) minutes provide a key insight into Fed thinking earlier in the month, with traders keen to gauge whether the September cut currently being priced in looks likely or not,
Joshua Mahony
Due later today, the Federal Reserve's meeting minutes from April 30-May 1 may reveal greater anxiety regarding the first-quarter U.S. inflation figures that were higher than anticipated, given that the meeting took place prior to the release of the consumer price inflation data last week.
Markets are still expecting U.S. inflation to decline, but analysts said that the PCE data, which is scheduled for release on May 31, will be a critical test.
The dollar index DXY was up 0.26% versus a basket of currencies at 104.91, hitting a high of the past week and rising above the five-week low of 104.07 that was reached the previous week.
BOE June cut reverses
Following UK inflation data that did not slow as much as anticipated but did approach the BoE's target in April, investors withdrew bets on a rate cut the following month, and the pound steadied after rising.
After increasing by 3.2% in March, British consumer prices increased by 2.3% annually in April. The BoE and Reuters-surveyed economists predicted an annual rate of 2.1%.
LSEG data shows that the money markets currently see only a 15% chance of a rate cut in June. Pricing in derivatives markets earlier this week indicated that traders believed there was a 55% chance that the first cut would occur in June.
After hitting a two-month high of $1.2761, the sterling GBPUSD fell 0.06% to $1.2702. The euro (EURGBP) dropped to two-month lows versus the pound, closing the day down 0.23% at 85.21 pence.
The head of G10 FX strategy at CIBC Capital Markets in London, Jeremy Stretch, stated that the rate repricing prompted by the inflation data appeared excessive.
Stretch added that the inflation data-induced rate repricing looked overdone, and cautioned that GBP rallies might be short-lived if tomorrow's flash service PMI reading reveals signs of consumer fatigue.
Additionally, the Reserve Bank of New Zealand raised its projections for peak interest rates during its most recent monetary policy meeting due to the persistently high level of inflation. The bank had previously kept its benchmark cash rate at 5.5%.
Rates are now predicted to peak at 5.7% by the end of 2024, up from 5.6% three months prior.
Reaching its highest level since March 14, the New Zealand dollar NZDUSD surged as high as $0.6152. It was last trading at $0.6106, up 0.25% against the US dollar. Even after suspected rounds of intervention earlier this month, traders remained on edge due to fears of further currency intervention by Tokyo.
The dollar USDJPY increased by 0.26% to 156.61 against the yen. Following data showing Japan's exports increased 8.3% in April compared to the same month last year, the yen saw minimal movement.