The U.S. dollar remained steady on Tuesday as investors eagerly awaited upcoming economic data to assess the likelihood of significant interest rate cuts. Meanwhile, a surge in Japanese stock markets provided some relief for yen carry trades, which had been under pressure.
The dollar was trading at 147.17 yen, after briefly reaching a one-week high of 148.23 overnight before retreating due to profit-taking.
The euro edged up to $1.0931, approaching resistance levels at $1.0944 and $1.0963. The dollar index held steady at 103.08.
Upcoming producer price index (PPI) data, expected later in the day, will serve as a precursor to the more critical inflation report due on Wednesday. The PPI figures, which are anticipated to show a 0.2% increase in both the headline and core measures, could influence market expectations as they feed into the core personal consumption expenditures (PCE) index favored by the Federal Reserve.
The focus, however, is on the consumer price index (CPI) and retail sales data for July, which could play a pivotal role in determining whether the Federal Reserve opts for a 25 or 50 basis point rate cut in September.
Futures markets are currently divided on the possibility of a larger rate cut, having briefly leaned toward it last week during a sharp sell-off in stock markets.
JPMorgan analysts noted in a recent report that a strong CPI and robust retail sales could lead to a quick repricing in the bond market, potentially reducing the chances of a 25-basis point cut. Conversely, weaker-than-expected data might ease concerns about stagflation but could raise fears of a recession, possibly pushing the bond market to price in a 50-basis point cut or more.
The potential outcomes would have varying impacts on the dollar. A stronger economy could drive up Treasury yields and support the greenback, while recession worries might boost the yen and Swiss franc, traditional safe-haven currencies.
The futures market still sees the possibility of a recession, with 101 basis points of Fed easing anticipated by the end of the year and over 120 basis points expected in 2024.
However, this outlook seems at odds with some of the current economic data, such as the Atlanta Fed’s GDPNow estimate, which predicts a 2.9% annual growth rate.
Analysts at ANZ observed that the July CPI is expected to show annual increases of 3.0% and 3.2% for the core rate. Despite a moderating trend, inflation remains too high for the Fed to justify the market’s pricing of 100 basis points of rate cuts between September and the end of the year.
A significant downturn in economic data or a sharper decline in inflation would likely be necessary for the Fed to consider such aggressive rate cuts.
