The US Dollar (USD) remained close to a two-week low on Thursday. This was in anticipation of U.S. inflation data that will influence the Federal Reserve’s next moves in its monetary policy. A day earlier, the minutes from the Fed’s previous meeting showed that policymakers were taking a cautious approach.
The dollar index, which measures the U.S. dollar against six other major currencies, was at 105.63, mostly unchanged for the day. However, it was not far from its lowest level since September 25, which was 105.53.
The euro and the Japanese yen had stable exchange rates against the U.S. dollar, with the euro at $1.06245 and the yen at 149.13 per dollar. The market was holding back on major currency movements due to the upcoming inflation data.
The U.S. consumer price index data for September is expected to show that inflation slowed down last month, and it is scheduled for release at 1230 GMT.
If the inflation figures turn out to be lower than expected, it could support the argument that the Fed has completed its process of raising interest rates. This would likely lead to a decrease in U.S. Treasury yields and a weaker dollar. On the other hand, if there is an unexpected increase in inflation, it could make it more likely that the Federal Open Market Committee will go ahead with its planned 25 basis point interest rate hike.
According to Carol Kong, a currency strategist at the Commonwealth Bank of Australia, futures markets are currently pricing in a 26% chance of a 25 basis point hike by the Fed’s December meeting, with only a 9% chance of a similar rise at the central bank’s next meeting in November, as per the CME FedWatch tool.
The recent weakness of the U.S. dollar is primarily due to declining Treasury yields. Bond prices have gone up as a result of the Fed’s more cautious stance on future interest rate hikes. Bond yields move in the opposite direction to bond prices.
The yield on 10-year Treasury notes was slightly lower at 4.575%. It had reached its highest level since 2007 last week at 4.887%, but it has fallen by about 20 basis points this week.
Additionally, currency investors are also considering sluggish growth figures from the United Kingdom for August. These figures indicate a partial recovery of the British economy following a significant drop in July. The British pound did not initially react, but it was last down 0.16% at $1.2295.
The pound was the best-performing currency among the Group of Ten (G10) major currencies in the first half of the year, thanks to positive economic data and expectations of higher interest rates from the Bank of England. However, in September, it experienced its worst month in a year as these factors reversed, and it has been steadying in the current month.
Nick Rees, an FX market analyst at Monex Europe, noted that without an improvement in economic growth, inflation is likely to continue moving back towards the Bank of England’s target. As a result, a final interest rate hike this year seems risky given the current economic weaknesses, and this perspective is shared by the foreign exchange markets.
This release of the Consumer Price Index (CPI) data comes after a mixed report on U.S. producer prices and the release of minutes from the Fed’s September meeting. The minutes showed that Fed officials are cautious due to uncertainties surrounding the economy, oil prices, and financial markets, supporting a careful approach to determining further policy adjustments.
