SINGAPORE: The dollar was steady in early trading on Tuesday, with the yen inching away from one-month highs as investors brace for U.S. inflation data and reassess expectations of a large interest rate cut from the Federal Reserve starting next week.
A mixed labour report on Friday failed to make a clear-cut case on whether the Fed would deliver a regular 25 basis point (bps) rate cut or an outsized 50 bps one at its Sept. 17-18 policy meeting.
Traders are now waiting on Wednesday’s U.S. consumer price index report for further policy clues although the Fed has made it clear employment has taken on a greater focus than inflation. The headline CPI is expected to have risen 0.2% on a month-on-month basis in August, according to a Reuters poll, unchanged from the previous month.
As the non-farm payrolls numbers failed to convince for a 50 bps cut, markets are now looking to the U.S. inflation data to understand the pace of the Fed’s rate cuts, ING economists said.
“It is clear that economic growth is losing momentum, and the markets now seem to be focused on whether the economy will end up with a soft or hard landing.”
Dollar tentative, yen dips on muddled Fed rate-cut outlook
Investor focus will also be on the highly anticipated televised U.S. Presidential debate later on Tuesday that could weigh heavily on the November election.
The dollar was up 0.1% at 143.30 yen, creeping away from the one-month low of 141.75 touched on Friday. Sterling last fetched $1.3061, having touched a near three-week low of $1.3058 earlier in the session.
The dollar index, which measures the U.S. currency against six rivals, was at 101.69 after rising 0.4% on Monday. The index fell 0.5% last week as traders’ expectations for rate cuts shifted.
Markets are currently fully pricing in a 25 bps cut next week, with a 50 bps cut priced in at 30%, down from as high as 50% on Friday, CME FedWatch tool showed.
A weaker-than-expected report could bolster market expectations of a 50 bps cut, but a steady reading may leave the 25 bps versus 50 bps debate unresolved, according to Charu Chanana, head of currency strategy at Saxo.
“Overall, the USD is expected to trade sideways to higher, as current Fed easing expectations still appear excessive.”
For 2024, traders expect 110 bps of easing, up from around 100 bps from the remaining three meetings.
Fed policymakers last week signalled they are ready to kick off a series of rate cuts, noting a cooling in the labour market that could turn more dire in the absence of a policy shift.
“This makes it likely that the Fed will opt for a 25bps cut to avoid signalling panic, though they may keep the door open for more aggressive cuts later in the year,” said Saxo’s Chanana.
Meanwhile, the euro was little changed at $1.10305 after dropping nearly 0.5% on Monday ahead of the European Central Bank policy meeting on Thursday where the central bank looks all but certain to cut rates again.
The spotlight though will be on the messaging from the central bankers.
In other currencies, the Australian dollar was 0.13% lower at $0.6652, having touched a more than three-week low of $0.66445. The New Zealand dollar fell 0.19% to $0.6133, staying close to the three-week low it touched on Monday.
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