The U.S. dollar firmed on Wednesday as investors eagerly awaited the Federal Reserve's meeting minutes for insights into the central bank's future interest rate trajectory. This move comes amidst a backdrop of mixed economic signals and ongoing inflation concerns.
Federal Reserve officials have recently maintained a cautious tone despite last week's milder inflation readings, with investors adjusting their bets on future rate cuts. Fed Governor Christopher Waller emphasized the need for several more months of favorable inflation data before considering rate reductions, a sentiment echoed by Cleveland Fed President Loretta Mester.
"Today's FOMC minutes provide a key insight into Fed thinking earlier in the month," said Joshua Mahony, chief market analyst at Scope Markets. "Traders are keen to gauge whether the September cut currently being priced in looks likely or not." The minutes from the Fed's April 30-May 1 meeting, due later in the day, are expected to reflect concerns about higher-than-expected U.S. inflation in the first quarter, given they were held before the latest consumer price inflation report.
The dollar index rose 0.26% against a basket of currencies to 104.91, reaching a one-week high and staying above the five-week low of 104.07 touched last week. This performance underscores the market's anticipation of further economic data and policy signals from the Fed.
Meanwhile, the British pound steadied after an initial jump following UK inflation data, which showed consumer prices rising by 2.3% in April year-on-year, down from 3.2% in March. Despite the slowdown, the figure was higher than the 2.1% forecast by the Bank of England (BoE) and economists polled by Reuters. This prompted investors to pull back from betting on a BoE rate cut in June. The pound edged 0.06% lower to $1.2702, having earlier touched a two-month high of $1.2761.
"The inflation data-induced rate repricing looks overdone," noted Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets in London. "We would be mindful of GBP rallies proving to be short-lived, as the immediate move in rate cut expectations appears overdone, not least should tomorrow's flash service PMI reading reveal signs of consumer fatigue."
In the Asia-Pacific region, the Reserve Bank of New Zealand left its benchmark cash rate unchanged at 5.5% as anticipated, but raised its forecasts for peak interest rates due to persistent inflation. The New Zealand dollar responded positively, rising 0.25% to $0.6106, its highest since March 14.
In Japan, the yen showed little change despite data revealing an 8.3% rise in exports in April from a year earlier, indicating some resilience in the Japanese economy amid global economic uncertainties. The dollar gained 0.26% against the yen, reaching 156.61.
The market also braced for the impact of Nvidia's earnings report, expected later in the day, which could set the tone for broader market sentiment. Nvidia's performance is particularly scrutinized as its chips are critical for AI development, a sector experiencing robust growth.
Amidst these developments, the dollar index continues to show strength. Technical analysis suggests that the DXY Index is nearing significant resistance levels, with the 55-day Simple Moving Average (SMA) at 104.74 and further resistance at 105.12 and 105.52. On the downside, support is seen around the 100-day SMA at 104.22, with potential declines finding further support at 103.00.
