The value of the dollar dropped to its lowest point in two months on Wednesday ahead of an important U.S. inflation report. At the same time, the pound reached a 15-month high following wage growth data that suggested the Bank of England (BoE) may increase interest rates further.
The yen also gained strength, surpassing 140 against the dollar for the first time in a month. This rise can be attributed to growing expectations that the Bank of Japan (BOJ) will announce changes to its ultra-low interest-rate policy during its upcoming meeting.
Investors are closely watching the forthcoming U.S. inflation data. Core consumer prices, which exclude food and energy, are projected to have increased by 5 percent in June compared to the previous year. These figures could provide insight into how much more the Federal Reserve might raise interest rates.
In anticipation of the report’s release, the U.S. dollar fell to a two-month low against a range of currencies, with the Japanese yen being the most notable performer.
According to Jordan Rochester, a currency strategist at Nomura, the key number to look out for in the consumer price report will be the monthly change in the core rate. Rochester added that various indicators indicate a significant drop in inflation, such as used-car prices. Consequently, some market participants only expect a rise of 0.2 percent in the core rate for June, while economists polled by Reuters anticipate a 0.3 percent increase.
Rochester explained that a rise of 0.3 percent would result in slight dollar strength, potentially pushing the dollar/yen exchange rate above 140. However, if the core rate rises by 0.4 percent, it would signify a deviation from the models and indicate a missed factor. This outcome could significantly impact market expectations as other charts suggest a rapid deceleration of inflation pressures in the U.S.
The dollar fell against the yen by up to 0.76 percent, reaching a one-month low of 139.32. It ultimately settled 0.6 percent lower at 139.55.
At the same time, the euro rose by 0.1 percent to $1.102, approaching two-month highs. The Swiss franc also saw gains, rising up to 0.3 percent to a 2.5-year high of 0.8765.
Elsa Lignos, RBC’s global head of FX strategy, commented on the market’s behavior, saying that forex had grown tired of waiting for a trend and monitoring the exceptional year-to-date rally of equity markets. Lignos suggested that market participants had chosen to trade based on the U.S. disinflation narrative in anticipation of the upcoming data release.
The pound reached a 15-month high of $1.2970, driven by expectations of the BoE implementing additional rate hikes to control inflation, which currently surpasses that of other major economies. The BoE’s banking system stress test results, released on Wednesday, indicated that the country’s eight largest lenders possess sufficient capital to withstand a more severe economic crisis than the one witnessed in 2008. This outcome further supports predictions of UK interest rates continuing to rise.
Market expectations imply that the BoE rate may reach around 6.4 percent by March, up from the current 5 percent.
Meanwhile, U.S. Treasury yields continue to decline, which has put additional downward pressure on the dollar. The benchmark 10-year note yield was down 3 basis points at 3.905 percent, on track for its third consecutive day of declines. Two-year yields fell by 4 basis points to 4.85 percent.
In other currency news, the New Zealand dollar declined by 0.2 percent to $0.6187. Its value experienced volatility after the Reserve Bank of New Zealand (RBNZ) decided to maintain interest rates as expected. The RBNZ also indicated that rates would remain steady for some time. The Australian dollar remained unchanged at $0.6685.
By Amanda Cooper
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