Dollar steady as traders await US rate policy clues

After data released last week showed that U.S. consumer prices rose less than expected in April, the markets are pricing in 50 basis points (bps) of easing, which means that rates will be cut at least twice this year.

However, several Fed officials have issued cautionary remarks regarding the potential timing of rate reductions.

With traders on the lookout for any indications of government intervention, the value of the Japanese yen remained unchanged at 155.74 per dollar. The last few trading days have seen the currency move in narrow ranges following a turbulent start to May due to rumors of Tokyo engaging in rounds of currency interventions to support the yen.

Is dollar slowing down?

Despite signs of slowing inflation, the dollar remained mostly stable on Monday as investors awaited more information to help predict the trajectory of U.S. interest rates following cautious remarks from Federal Reserve officials.

Due to this, traders have reduced the anticipated easing this year to roughly 46 basis points, with only a rate cut in November being fully priced in.

The focus will now be on the Personal Consumption Expenditures (PCE) price index report, which is scheduled for release on May 31 and is the Fed's preferred measure of inflation. Moreover, the head economist at Annex Wealth Management, Brian Jacobsen, stated that "the Fed will not have enough data by the June or the July meeting to be confident enough to cut rates."

The Fed will not have enough data by the June or the July meeting to be confident enough to cut rates. Come August, (Fed) Chair Powell could take the Jackson Hole conference as a time to explain their thinking around the path ahead, teeing up a September cut. Let’s just hope the data cooperates.

Brian Jacobsen

The Fed's most recent meeting minutes, which are due on Wednesday, will also be a focus for the markets. This week also brings a schedule of Fed speakers and the release of flash PMIs for the euro zone, Germany, the UK, and the U.S.

Furthermore, the April CPI report will have cheered the Fed, but before it considers loosening policy, ANZ analysts said the U.S. central bank will need some more evidence that inflation is returning to its target of 2% sustainably.

The euro was also up 0.13% on Monday at $1.08825, closing in on last week's nearly two-month high of $1.0895. May has seen a 2% increase in the single currency, which is expected to be its best monthly performance since November.

Additionally the European Central Bank made it clear last month that a cut will be its next move, most likely in June, and the markets are currently pricing in 66 basis points of easing from the central bank this year.

Officials are urging caution

The dollar index, which compares the value of the US dollar to six competitors, barely moved, hovering around 104.44. This month's 1.7% decline in the index is expected to be its worst monthly performance of the year.

In other words, ahead of the important UK inflation report that is expected on Wednesday, sterling reached a two-month high of $1.2711. Markets are factoring in 56 basis points of cutbacks from the Bank of England, with a June announcement anticipated.

Paul Mackel, global head of FX research at HSBC, stated that it is widely known that the June rate cut scenario is contingent upon the CPI data released this week and the upcoming inflation report, which they will release on June 19. On June 20, the BoE will convene.

The New Zealand dollar was last at $0.61295, not far from its two-month high, while the Australian dollar was up 0.18% at $0.67055, nearing its four-month peak. [AUD]

Furthermore, the Reserve Bank of New Zealand is expected to maintain its benchmark cash rate at 5.5% when it makes its policy decision on Wednesday. The main concern is whether the bank will alter its outlook for rates beyond the end of the year.

Charu Chanana, head of currency strategy at Saxo, said that the kiwi's rally could be strengthened if the RBNZ goes against the market's expectations for policy easing by the end of the year in its next statement.