The dollar inched up against most major currencies on Friday, with investors positioning before a key US jobs report that could bolster expectations of an interest rate hike in coming months. The market consensus is for the US economy to have created 164,000 jobs in May, a tad higher from April with the unemployment rate set to edge lower to 4.9 percent in May from 5.0 percent a month earlier. Traders will also eye signs of wage growth cues on whether the Fed will tighten or not.
According to CME Group FedWatch programme, investors are pricing in a 21 percent probability of a rate move in June, down from around 32 percent factored in earlier in the week. For July, though, investors were pricing in a 48.6 percent chance of a hike, up from 19.7 percent a month ago. Expectations for a rate hike over the summer have been ramped up in recent weeks after a slew of good data and hawkish comments from senior Federal Reserve officials. Chicago Federal Reserve President Charles Evans, a noted dove, said on Friday that the Fed might increase rates in June, July or September.
The Fed holds its next policy meeting on June 14-15. It raised rates for the first time in nearly a decade in December from historic low levels and wants to gradually tighten policy to ensure there are no imbalances in the economy. The dollar was a tad higher against the yen at 108.92 yen, while the euro was 0.1 percent lower at $1.1140. "There is clearly a desire within the Fed to raise interest rates again over the summer, given how hawkish the commentary has been in recent months but they have repeatedly stressed that the data must perform in line with expectations," said Craig Erlam, senior market analyst at OANDA.
"The data has improved considerably recently, from retail sales and personal spending figures to the inflation data, but I think policy makers would like to see at least one more strong jobs report before they take the plunge." The euro was slightly lower, and trading close to a three-year low against the yen, weakened after the European Central Bank failed to lift its long-term forecasts, raising the prospect of yet more monetary easing.
Though the ECB did adjust its 2016 inflation forecast by 0.1 percentage points, it left its 2017 and 2018 projections unchanged. The bank also cut its outlook for underlying inflation and lowered its forecast for consumption and government consumption, suggesting persistent slack in the economy. The euro fell to 121.065 yen after the ECB's press conference, its weakest since April 2013. On Friday it was just above that low at 121.31 yen, down 0.1 percent on the day.
"The main takeaway for us ... from the press conference was the fact that (ECB President Mario) Draghi didn't dismiss out of hand the idea of more easing in the future," said Bank of Tokyo-Mitsubishi UFJ's European head of global markets research in London, Derek Halpenny. "It was the first indication that ... we're going to get some form of tapering timetable announced later this year - some kind of further easing measures," he added.
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