The U.S. dollar edged down on Tuesday, marking its first monthly decline in 2024, as traders anticipated crucial inflation data from the U.S. and the eurozone later this week. The greenback's dip came amidst heightened expectations that major central banks might soon adjust their monetary policies.
Against a basket of six major currencies, the dollar fell 0.2% to 104.44, a 1.84% decline for the month. This retreat reflects growing speculation that the Federal Reserve might start cutting interest rates by the end of the year. "A backdrop where the Federal Reserve can start cutting rates this year, even in December, is consistent with further dollar weakness," commented Athanasios Vamvakidis, global head of forex strategy at BofA.
Market participants are closely watching U.S. economic data, which has shown signs of weakness, in contrast to stronger-than-expected figures from the eurozone. This divergence has supported the euro, which rose 0.25% to $1.0885, despite some dovish remarks from European Central Bank (ECB) policymakers and stagnant German business morale in May.
ECB policymaker Francois Villeroy de Galhau affirmed that a rate cut next week is likely, barring any major surprises. However, investors are cautious about the pace of future cuts, anticipating less frequent adjustments through 2024 and early 2025. German inflation data on Wednesday and the broader eurozone figures on Friday will be pivotal in shaping these expectations.
The main focus for markets this week is the U.S. core personal consumption expenditures (PCE) price index report, due on Friday. As the Federal Reserve's preferred inflation gauge, its results will be critical in determining the Fed's policy direction. Analysts expect the index to hold steady on a monthly basis, though any upside surprise could influence market sentiment.
Derek Halpenny, head of research, global markets EMEA at MUFG Bank, noted that markets are increasingly sensitive to strong data. "This increased debate on the Fed's implied neutral policy stance could have an increasing impact on lifting market yields if the economy fails to slow," he said.
Meanwhile, the yen remained weak, trading near 157 per dollar, last recorded at 156.80 per dollar. Vamvakidis suggested that a Fed rate cut in 2024 could strengthen the yen against the dollar. Conversely, if the Fed delays easing until 2025, the yen could test the 160 level again, potentially prompting further intervention by Japanese authorities.
Data released on Tuesday showed that the Bank of Japan's (BOJ) three key measures of underlying inflation fell below 2% in April for the first time since August 2022, adding uncertainty to the timing of its next interest rate hike. BOJ Governor Kazuo Ueda emphasized a cautious approach to inflation targeting frameworks.
Sterling and the New Zealand dollar both reached over two-month highs, trading at $1.2786 and $0.6162, respectively. The Australian dollar also edged 0.25% higher, with monthly consumer price index data due on Wednesday.
