The dollar stops: The US dollar remained in a wait-and-see mode on Tuesday as market participants awaited fresh economic data that could influence the likelihood of significant rate cuts. Meanwhile, a rally in Japanese stocks provided some relief to yen carry trades.
The dollar held around 147.17 yen, having briefly risen to a one-week high of 148.23 before suffering profit-taking. The euro was trading at $1.0931, approaching resistance levels of $1.0944 and $1.0963. The dollar index was steady at 103.08.
Upcoming producer price index (PPI) figures are expected to give an initial indication of inflation trends, with forecasts predicting a 0.2 percent rise in both the headline PPI and the core indicator. These data will precede the more crucial consumer price index (CPI) and retail sales reports for July, which are expected to significantly impact the Federal Reserve’s policy decisions.
Futures markets are currently divided on the likelihood of a 25 basis point versus 50 basis point cut in September, and expectations have fluctuated recently due to volatility in equity markets. JPMorgan analysts noted that strong CPI and robust retail sales could lead to a quick adjustment in bond markets in favor of a 25 basis point cut. Conversely, weaker CPI and sales data could raise recession fears, potentially leading to a larger rate cut.
The outlook for Treasury yields and the dollar hinges on these economic reports. Strong data could support the dollar and lift yields, while weaker data could have the opposite effect, potentially boosting safe-haven currencies like the yen and Swiss franc.
Even though futures are forecasting the Fed to pursue 100 basis points more expansionary monetary policy by the end of the year, this is in contrast to stronger than expected economic growth, such as the Atlanta Fed’s GDPNow estimate of a 2.9% annual growth rate. ANZ analysts noted that July CPI figures are projected at 3.0% yoy overall and 3.2% yoy for the core measure. While inflation is moderating, it remains too high for the Fed to justify market expectations of 100 basis points in rate cuts between September and the end of the year without significant changes in the data or a more pronounced disinflationary trend.(With contributions from Reuters)
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