SINGAPORE/LONDON: The dollar held steady on Monday, but was set for its first monthly loss this year, as investors were focused on US, European and Japanese inflation data to guide the global interest rate outlook.
Foreign exchange trade has been dominated by the hunt for “carry” in recent months, punishing low-yield currencies and supporting the dollar, while US data has blown hot and cold and dented policymakers’ confidence on the rates outlook.
Several major pairs have hugged tight ranges. The euro, which gained 0.9% on the dollar last week, was in the middle of a range it has held for more than a year at $1.0845.
The euro offered little reaction to a survey on Monday that showed German business confidence worsened in May, against forecasts for an improvement.
Trading on Monday was thinned out by holidays in Britain and the United States.
German inflation data on Wednesday and euro zone readings on Friday will be watched for confirmation of a European rate cut that traders have pencilled in for next week.
ECB chief economist Philip Lane said on Monday the pace at which the central bank cuts rates will depend on the strength of underlying inflation.
Sterling was testing the top side of a range it has held this year at $1.2745.
Friday’s reading for the US core personal consumption expenditures price index, the Federal Reserve’s preferred inflation measure, is expected to be steady month-on-month.
The dollar had fallen back after data showed a slowdown in consumer price rises in April and confirming the trend could pull it lower still - but the big picture is that inflation and inflation indicators remain above the Fed’s 2% target.
The dollar index, which measures the performance of the US currency against six others, was last down modestly at 104.72. It is on track for a drop of 1.5% in May, the most in one month since December.
“A 25-bp (basis point US interest rate) cut in September is priced at a 50/50 proposition, with a total of 57 bps of cuts priced by December - so we’d need a big surprise to change that pricing,” Pepperstone strategist Christ Weston said.
“US core PCE above 3% could do the trick, and that would get the dollar humming along, while a print below 2.7% could see relief resonate through markets,” he said.
While the rates uncertainty persists, investors have been chasing income and selling low yield currencies such as the yen, yuan and Swiss franc against the euro and the dollar.
The yen may seal its first monthly gain of the year this month thanks to suspected intervention from Japanese authorities towards the end of April and at the start of May, but it has been slipping back since then.
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