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Dollar strengthens ahead of news on global inflation

May 27, 2024

Key points:

  • Dollar supported by interest rate expectations and mixed U.S. economic data.
  • Euro and yen trading in tight ranges, awaiting key inflation readings.

The dollar started the week on a firm note as traders awaited crucial inflation data from the U.S., Europe, and Japan. This data is expected to provide clarity on the future of global interest rates. In recent months, the search for yield has dominated foreign exchange markets, with low-interest currencies under pressure while the dollar benefited from fluctuating U.S. economic data.

Recent news: Dollar rises as traders scale back US rate cut expectations

Chart displaying EUR/USD exchange rate at 1.08479 with a trend of 0.03%, reflecting the dollar strengthening ahead of news on global inflation. The chart features moving averages (MA) and MACD indicators. The euro, which gained 0.9% against the dollar last week, traded at $1.0846, staying within a range it has held for over a year. Image hosted by VT Markets, a forex CFDs brokerage.

Picture: Euro gained against the US dollar. Download the VT Markets app to see more.

The euro, which gained 0.9% against the dollar last week, traded at $1.0846, staying within a range it has held for over a year. Market activity was subdued due to public holidays in Britain and the U.S. Investors are keenly watching German inflation data on Wednesday and broader euro zone readings on Friday, which could confirm a European Central Bank (ECB) rate cut that traders have priced in for next week.

Sterling tested the upper end of its range for the year, trading at $1.2735. Meanwhile, the Australian and New Zealand dollars have retreated from recent highs, with the Aussie at $0.6626 and the kiwi at $0.6122, as markets have scaled back expectations for U.S. interest rate cuts.

Market awaits core PCE price index

The core personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation measure, is due on Friday. A stable reading is expected month-on-month, but any surprises could significantly impact currency markets. The dollar had recently weakened after data showed a slowdown in April’s consumer price rises and disappointing retail sales figures. However, it rebounded last week due to better-than-expected PMI survey results.

Investors have been seeking higher yields amid ongoing interest rate uncertainty, selling low-yield currencies like the yen, yuan, and Swiss franc against the euro and the dollar. The Swiss franc has been weakening throughout the year, reaching 0.9928 francs per euro last week, its lowest since April 2023. China’s yuan ended last week weaker than 7.24 per dollar, its lowest since early May.

Chart displaying USD/CHF exchange rate at 0.91429 with a trend of 0.07%, reflecting the dollar strengthening ahead of news on global inflation. The chart features moving averages (MA) and MACD indicators. The Swiss franc has been weakening throughout the year, reaching 0.9928 francs per euro last week, its lowest since April 2023. Image hosted by VT Markets, a forex CFDs brokerage

SEE: Swiss franc continues its weakening, sees a decline on the VT Markets app.

The yen, steady at 156.87 to the dollar on Monday, may see its first monthly gain this year due to suspected intervention by Japanese authorities in late April and early May. However, it remains near multi-decade lows. Despite rising Japanese government bond yields, U.S. yields at the ten-year tenor are nearly 350 basis points higher.

Tokyo CPI data and U.S. settlement change
Friday’s Tokyo CPI data will be a crucial indicator of national inflation trends. Additionally, the U.S. move to shorten equity-market settlement from two days to one is expected to impact currency trading, particularly in the early morning hours in Asia.

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