The dollar held steady on Tuesday and the yen edged away from one-month highs in cautious trading as investors braced for U.S. inflation data and reassessed expectations of a big interest rate cut by the Federal Reserve next week.
A mixed jobs report released Friday failed to make clear whether the Fed will deliver a regular 25 basis point (bp) rate cut or a blockbuster 50 bp cut at its Sept. 17-18 policy meeting.
Traders are now looking to Wednesday’s U.S. consumer price index report for further clues on monetary policy, although the Federal Reserve has made clear that employment has drawn more attention than inflation. The headline CPI is expected to have risen 0.2 percent month-on-month in August, according to a Reuters poll, unchanged from the previous month.
A weaker-than-expected report could reinforce market expectations for a 50 basis point cut, but a stable reading may leave the 25 basis point versus 50 basis point debate unresolved, according to Charu Chanana, head of FX strategy at Saxo.
“Overall, the dollar is expected to trade sideways to higher as current expectations for Federal Reserve easing still appear excessive.”
The Chinese yuan weakened slightly on Tuesday, but losses were limited by better-than-expected export data. CNY/
Imports, however, missed forecasts and rose just 0.5 percent, following lower-than-expected inflation data released on Monday, highlighting that domestic demand remains weak.
Investors’ attention will also be focused on the highly anticipated televised US presidential debate later on Tuesday, which could weigh heavily on the November election.
The dollar was little changed at 143.10 yen JPY=EBS, giving back gains from the previous session but still off a one-month low of 141.75 hit on Friday. The greenback fell 2.7 percent last week against the yen.
The dollar index =USD, which measures the U.S. currency against six rivals, was at 101.61 after rising 0.4 percent on Monday.
Markets are currently fully pricing in a 25 basis point cut next week, with a 50 basis point cut priced in at 30 percent, down from Friday’s high of 50 percent, the CME FedWatch tool showed.
For 2024, traders expect easing of 110 basis points, compared with 100 basis points at the remaining three meetings. FEDWATCH
Last week, Federal Reserve officials signaled they are ready to begin a series of rate cuts, highlighting a slowdown in the labor market that could become more severe absent a policy shift.
“Fed rate cuts are coming,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial.
“But in our view, what matters less is whether the first cut is 25 or 50 basis points. The more important dynamic for investors to watch closely is whether rate cuts from there take the escalator or the elevator.”
Meanwhile, the euro EUR=EBS was trading at $1.1039 after falling nearly 0.5 percent on Monday ahead of the European Central Bank’s monetary policy meeting on Thursday, where the central bank looks all but certain to cut rates again.
However, the focus will be on the central bankers’ message. Traders expect a 63 basis point easing by the ECB this year.
On the other hand, markets are anticipating a 47 basis point easing by the Bank of England in 2024 and the divergence between US and UK rates led sterling to hit a one-year high in August, although the pound has weakened somewhat since then.
The pound GBP=D3 was last trading at $1.307, having hit a near three-week low of $1.3058 earlier in the session, ahead of a slate of jobs and wages data later in the day that will help influence BoE policy moves when it meets next week.
Tuesday’s data is expected to show solid job growth and further moderation in wage growth.
In other currencies, the Australian dollar AUD=D3 was trading at $0.66655, having touched a more than three-week low of $0.66445. The New Zealand dollar NZD=D3 was trading at $0.6148, holding near the three-week low hit on Monday.
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