Dollar soft as falling US inflation paves the way for rate cuts by Reuters

By Ankur Banerjee

SINGAPORE (Reuters) – The dollar was on the back foot on Thursday, with the euro perched near an eight-month high after data showed U.S. inflation slowed, supporting bets that the Federal Reserve could cut borrowing costs this month future

The yen was steady at 147.26 per dollar after data showed Japan’s economy expanded at a faster-than-expected 3.1% annual rate in April-June, rebounding from the previous quarter on a solid rise in consumption.

In the US, data on Wednesday showed the consumer price index rose moderately, in line with expectations, and annual inflation growth slowed to below 3% for the first time since early 2021.

The figures add to the slight rise in producer prices since July, suggesting inflation is on a downward trend, although traders now anticipate the Fed will not be as aggressive in cutting rates as they had hoped.

Josh Chastant, public markets portfolio manager at GuideStone Funds, said both CPI and US PPI data point to a 25 basis point (bps) cut by the Fed in September.

“A lot will depend on the tone of the minutes and press conference after the meeting, but markets could be slightly disappointed if we only get a 25bp cut,” he said.

Markets are now pricing in a 64% chance of a 25bps cut next month and a 36% chance of a 50bps cut, CME’s FedWatch tool showed. Traders were evenly split earlier in the week between the two bearish options following last week’s selloff.

Markets anticipate 100 bps of tapering this year from the Fed.

“The blinding green light for rate cuts remains firmly on, and the Fed is getting the disinflationary evidence it needs to gain the confidence to do so,” said Kyle Chapman, currency market analyst at the Ballinger Group.

“A cut of 50 bps is a desperate move and would depend more on a growth scare.”

The euro was flat at $1.10110 in early trade, nearing $1.10475, the highest level since early January that it hit on Wednesday. The single currency rose 0.86% this week, set for its strongest weekly performance in over a month.

Sterling was little changed at $1.2826 after falling on Wednesday as a weaker-than-expected reading on UK consumer price inflation supported expectations of further interest rate cuts from the Bank of England this year.

which measures the US unit against six rivals, was last at 102.6, not far from the eight-month low of 102.15 it hit last week. The index is on course for a fourth consecutive week in the red, a stretch it last had in March-April 2023.

Investors’ focus will now turn to US retail sales data due later on Thursday.

Elsewhere, the yen pulled away from a seven-month high of 141.675 hit during last week’s market turmoil.

Investors are still digesting Japanese Prime Minister Fumio Kishida’s decision to step down next month, although analysts said the news had limited impact on markets.

The New Zealand dollar was last little changed at $0.5997 after falling more than 1% in the previous session after the Reserve Bank of New Zealand cut its cash rate by a quarter point, its first relaxation from the beginning of 2020.

The Australian dollar held steady at $0.6595 ahead of jobs data that could weigh on interest rate expectations.

A lower unemployment rate could prompt markets to price in an interest rate cut from Australia’s central bank this year and support the dollar, according to Kristina Clifton, senior economist at Commonwealth Bank of Australia (OTC:).