Ahead of Global Inflation Data: US Dollar Begins to Show Its Fangs!


The US Dollar remained steady on Monday, but was on track for its first monthly loss of the year, as investors focused on inflation data from the US, Europe, and Japan to steer the outlook for global interest rates.

Several major pairs remain in tight ranges. The euro, which strengthened 0.9% against the US dollar last week, is in the middle of a range it has held for more than a year at $1.0845.

The euro showed little reaction to a survey on Monday that showed German business confidence slipped in May, contrary to forecasts for an increase. Trading on Monday was less active due to holidays in Britain and the United States.

German inflation data on Wednesday and European zone readings on Friday will be watched for confirmation of European rate cuts planned by traders for next week.

The ECB's chief economist, Philip Lane, said on Monday that the rate at which the central bank cuts rates will depend on the strength of underlying inflation.

Sterling is testing the top of the range it has held this year at $1.2745. Friday's reading for the US core personal consumption expenditure price index, the Federal Reserve's preferred measure of inflation, was expected to be steady on a month-on-month basis.

The US Dollar has weakened after data showed a slowdown in consumer price increases in April and confirmed the trend could pull inflation even lower. Waima so the big picture is that inflation and inflation indicators remain above the Fed's 2% target.

The US dollar index, which measures the US currency's performance against six other currencies, was last down slightly at 104.72. It was on track for a 1.5% decline in May, the most in one month since December.

“A US interest rate cut of 25 basis points in September is estimated to be a 50/50 possibility, with a total of 57 basis points of reduction estimated by December. On that basis we need a big surprise to change the estimate," said Pepperstone strategist Christ Weston.

"A US core PCE index above 3% could do that, and that would make the US dollar stronger, while a reading below 2.7% could provide relief to the market," he said.

While rate uncertainty continues, investors chase income and sell low-yielding currencies such as the yen, yuan and Swiss franc against the euro and US dollar.

The yen may have posted its first monthly gain this year following a string of suspected interventions from Japanese authorities in late April and early May, but it has since retreated.

It remained steady at 156.86 against the US dollar on Monday but did not get much support from rising 10-year Japanese government bond yields. Tokyo CPI data, due out on Friday, is a reliable guide for indications and will be closely watched. Finance ministry data on Friday will also reveal Japan's rate of intervention.

The US move to shorten equity market settlement from two days to one day is another factor to watch in currency trading this week as traders expect it may prompt calm trading in Asia.

In the cryptocurrency market, Ethereum closed its biggest weekly gain in nearly three years after surprise approvals for several US exchange-traded fund (ETF) applications.