Feb 28 (Reuters) –The dollar index rose 0.1%, but was well off its earlier Wednesday highs as markets braced for Thursday’s U.S. and euro zone inflation reports that could impact risk-sensitive currencies if the data dim or augment Fed and ECB rate cut pricing and end EUR/USD’s stagnation if the data diverge.
EUR/USD fell 0.05%, having rebounded after holding some key supports amid Wednesday’s early, broad-based dollar rise, but it may take Thursday’s U.S. core PCE and euro zone states’ CPI reports to determine if the near halving of expected 2024 Fed rate cuts in February and its support for the dollar has run its course.
The Fed is priced as a 65% probability to begin cutting rates by June, with 81bp of easing by year-end. A June ECB rate cut is fully priced in, with 90bp of cuts this year.
Core PCE is forecast up 0.4% month-on-month versus December’s 0.2% increase, with the year-on-year forecast at 2.8% from 2.9% last. Already reported U.S. January core CPI data was roundly above forecast, up 0.4% month-on-month and steady at 3.9% year-on-year.
The full euro zone overall and core CPI, due out on Friday, is forecast at 2.5% and 2.9% year-on-year versus 2.8% and 3.3% in December.
With the Fed and ECB now seen as being on similar policy easing paths, the question is whether U.S. economy will continue to outperform the euro zone, UK and Japanese economies, thus limiting dollar downside.
USD/JPY rose 0.11%, with its 2024 uptrend toward 2023/22’s 32-year peaks trying to reassert itself into Thursday and next week’s key U.S. data after an 11-day consolidation.
There are limited expectations for BoJ rate hikes beyond the 10bp move to zero priced for April or June. But also with the third largest net spec USD/JPY long position since 2017 that may require new Treasury-JGB yield spread highs to persist.
The latest spate of Fed speakers are all basically saying the same thing: they’re not ready to begin cutting rates yet. And Wednesday’s U.S. data did little to change that view, even if two-year Treasury yields drifted 5bp lower.
Sterling fell 0.2%, with its risk-sensitivity weighing amid the day’s risk-off theme.
AUD/USD and kiwi fell 0.7% and 1.22% after below-forecast Australian inflation, a less hawkish RBNZ meeting and amid ongoing concerns about China’s property markets and government interventions, as Hong Kong scrambles to stanch its property problems.
For more click on FXBUZ
Editing by Burton Frierson
Randolph Donney is a Reuters market analyst. The views expressed are his own.