The US inflation data released yesterday was lower than anticipated, and the Federal Reserve's forecast of just one rate cut this year caused the dollar to weaken slightly, but it recovered some of those losses today.
Ahead of a meeting of the Bank of Japan on Friday, traders braced themselves for further volatility in the yen.
In contrast to the previous day, when the dollar experienced a near-1% decline following the release of the consumer price index (CPI) data, price action in the currency market on Thursday was comparatively muted. However, the dollar ended the day with a 0.5% loss, which was still the largest in the past two weeks.
In May, US consumer prices remained unchanged from April, defying market expectations of a 0.1% increase.
Fiona Cincotta, a market strategist for City Index, said that the response (to that CPI) was a little too extreme.
I feel it was a bit overdone, the reaction that CPI. It was almost a relief that it wasn't worse. And that's what sparked such a strong knee-jerk reaction
Fiona Cincotta
She continued by saying that they witnessed the dollar's sell-off reverse as the Fed released its statement and that it is currently trending higher. Perhaps that inflation print wasn't quite as "cooling" in the cold as the market initially perceived it to be.
The annual rate of inflation increased to 3.4%, which is still significantly higher than the Fed's 2% target.
The funds rate was kept on hold by the Federal Reserve later yesterday at 5.25–5.5 percent, and the median estimate of policymakers for the number of cuts this year dropped from three in March to just one.
US Dollar weakening?
Markets continued to price in nearly two 25 basis point rate cuts this year despite the Fed's projections.
"The US dollar is perceived by markets as weakening, with fluctuations in between," Imre Speizer, a strategist at Westpac, stated in Auckland. She added that it's (mainly) because this year's Fed rate cuts are still factored in.
Markets are looking at the U.S. dollar as weakening, with fluctuations in between
Imre Speizer
In response to the US inflation data released yesterday, the euro experienced its biggest one-day rally of 2024. This week has seen a great deal of volatility for the single European currency due to political unrest in France, where President Emmanuel Macron called for an early election after his country did poorly in the European Union elections.
The euro, which earlier this week skimmed six-week lows, was down 0.2% at US$1.0788 (RM5.08) after rising 0.64 % the day before. The premium that traders are willing to pay for the option to sell the euro instead of purchase it has increased to the highest level since April, according to the derivatives market.
After rising 0.5% the day before, the value of sterling, which also faces political risk due to Britain's general election on July 4, decreased by 0.2% to US$1.277.
In his press conference, US Fed Chair Jerome Powell adopted a familiar tone and emphasized that policymakers would be attentive to economic data. Rate cuts were penciled in for 2025 or 2026 by policymakers, despite the fact that fewer were anticipated for this year.
Even so, it was chilly comfort for the yen, which is fighting against a downward trend given the huge difference between short-term US rates, which are significantly higher, and near-zero Japanese rates.
Furthermore, the markets are anticipating an announcement or signal from the BoJ at the end of its two-day policy meeting on Friday, indicating that the bank will be reducing its massive bond purchases to permit further increases in Japanese yields.
The yen is thus exposed to disappointment. It was down on crosses, with the kiwi hitting an overnight low of 97.06 and the sterling reaching a 16-year low of 200.91. It was last trading at 157.21 to the dollar.
Lastly, the volatility of overnight implied options, a gauge of traders' desire for insurance against significant currency fluctuations, reached a six-week high.