The US Dollar (USD) hit a four-week high on Tuesday, ahead of a highly anticipated inflation report that is likely to influence the timing of the first rate cut by the U.S. Federal Reserve, while the euro was pressured by political uncertainty in the region.
Stronger-than-expected jobs gains and higher wage inflation in Friday’s jobs report for May raised concerns that inflation may remain sticky while growth stays strong, making the U.S. central bank less likely to cut rates in the coming months.
Traders have pared back expectations of the first rate cut in September, which now has roughly 50-50 odds.
The consumer price index (CPI) data is due on Wednesday, just before the Fed concludes its two-day meeting.
“I do think the Fed members will take that (CPI data) into consideration,” said Noel Dixon, senior macro strategist at State Street Global Markets in Boston.
The U.S. central bank is expected to leave interest rates unchanged, but Fed policymakers will update their projections – which is widely known as the “dot plot.”
If inflation remains in line with expectations, Dixon expects the dots to show an expectation of two 25-basis-point cuts this year, down from the median projection of three cuts per March estimates.
“You could get some short-term weakness in the dollar, especially given the big move we’ve had in euro/dollar,” Dixon said.
However, “once the dust settles, I think we’ll get back to the relative monetary policy divergence story and I think that’ll continue to be supportive for the dollar going into the rest of the year.”
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