The dollar fell on Tuesday ahead of a keenly anticipated inflation report, while the yen strengthened as surprise pick Kazuo Ueda was nominated as the Bank of Japan’s next governor.
Sterling inched higher after UK job data showing basic pay growth sped up, but the labour market cooled.
Markets are looking to US consumer inflation data for further clues on the Federal Reserve’s policy outlook, with the headline number expected to have risen by an annual 6.2% in January according to a Reuters poll, after December’s 6.5% gain.
The dollar index , which measures the U.S. currency against six major rivals, fell 0.19% to 103.02 by 0900 GMT. It has weakened 10% since touching a 20-year high in September.
Moh Siong Sim, a currency strategist at Bank of Singapore, said the foreign exchange market was in a holding pattern.
The debate right now is whether inflation will be stuck at 3% to 4% or move lower to 2% in line with the market’s earlier hopes, Sim said.
“The odds are shifting to a more reasonable assessment that we might possibly get stuck at 3-4% and the Fed will have to do more.”
The U.S. central bank earlier this month raised interest rates by 25 basis points, but said that it was turning the corner in its fight against inflation.
The market is pricing U.S. interest rates to peak at around 5.2% in July and ending the year at 4.9%, moving away from earlier expectations for the start of rate cuts later this year.
UK JOBS LIFT STERLING
Sterling <GBP= D3> inched 0.32% higher to $1.2179 after data showed the pace of growth in basic pay in Britain sped up again in the last three months of 2022.
The pace of pay growth in Britain is being monitored closely by the Bank of England (BoE) as it gauges how much higher to raise interest rates.
“With the BoE having already signalled on numerous occasions that a tight labour market remains a threat to price stability, today’s figures will cement expectations that interest rates will be raised further at next month’s MPC meeting,” said Stuart Cole, head macro economist at Equiti Capital.
The euro was up 0.23% at $1.0750 ahead of euro zone employment figures due at 1000 GMT.
NEW BOJ GOV
Elsewhere, Japan’s government named academic Kazuo Ueda as its pick to become the next central bank governor, with investors betting that the surprise choice could preclude an end to the unpopular yield control policy.
National Australia Bank’s currency strategist Rodrigo Catril said Ueda, a former BOJ policy board member and an academic at Kyoritsu Women’s University, is regarded as a sensible choice as he is not a fully committed “uber dove” and he should have more flexibility as an outsider.
The Japanese yen strengthened 0.31% to 132.00 per dollar. The yen dropped sharply last year to a 32-year low of 151.94 per dollar as U.S. rates rose and Japanese rates stayed near zero, but it has since recouped those losses as the Fed looks to pause its tightening while speculation increases that the BOJ will move away from its ultra-loose policy.
Data on Tuesday showed Japan’s economy averted recession but rebounded much less than expected in October-December as business investment slumped, meaning an exit from stimulus will prove a challenge for the BOJ.
