The U.S. dollar remained under pressure on Wednesday after a significant drop against major currencies overnight. This decline followed a softer-than-expected U.S. producer price index (PPI) report, which bolstered expectations of interest rate cuts by the Federal Reserve later this year.
Currencies that are sensitive to market risk held strong as the easing inflation data lifted equity markets. This was despite the anticipation of key U.S. consumer price index (CPI) data, which was due later in the day.
The Australian dollar hit its highest point in over three weeks, while the British pound hovered near a two-week high, following its best one-day performance against the dollar since late April.
The New Zealand dollar remained close to a four-week peak as investors awaited the Reserve Bank of New Zealand’s (RBNZ) policy announcement. The market was divided on whether the RBNZ would opt for a rate cut.
The U.S. dollar index, which tracks the currency against six major counterparts including the pound, euro, and yen, held steady at 102.63 after dropping 0.49% overnight.
Before the PPI report, traders were already confident that the Federal Open Market Committee (FOMC) would reduce rates at its September meeting. The likelihood of a substantial 50 basis point cut increased to 53.5% from 50% the previous day, according to CME’s FedWatch Tool.
Analysts from the Commonwealth Bank of Australia (CBA) predict the dollar will remain in a holding pattern until the U.S. CPI data is released. They noted the possibility of further dollar weakness if the core CPI rises by 0.1% or less, while a rise of 0.2% to 0.3% might have a less significant impact.
The British pound held steady at $1.2866 after a 0.76% surge on Tuesday, which was fueled by a surprising decrease in the UK’s unemployment rate.
The euro remained stable at $1.0996 after reaching $1.099975 on Tuesday, its highest level since August 5.
The dollar was steady at 147.06 yen, consolidating around the 147 level for most of the week.
The Australian dollar remained relatively unchanged at $0.6637, having touched $0.66395 earlier, its highest level since July 23.
The New Zealand dollar edged up by 0.07% to $0.6081, close to its highest point since July 18.
A recent Reuters poll of 31 analysts showed that 19 expect the RBNZ to keep the cash rate unchanged at 5.5%, while 12 predict a 25 basis point cut. However, many analysts acknowledged that the decision could go either way.
Meanwhile, market participants have priced in a 69% chance of a rate cut, with expectations rising after the central bank’s recent survey revealed inflation expectations had fallen to a three-year low.
“The RBNZ is known for its independent approach, and whether the drop in inflation from 7.3% to 3.3% and signs of a weakening labor market (with unemployment rising to 4.6%) will prompt a rate cut today or a delay until October remains to be seen,” commented Tony Sycamore, a market analyst at IG.
