Sterling and euro fell against a strengthening dollar ahead of a key U.S. inflation report due later on Wednesday, with traders cautious as markets raised bets for a European Central Bank rate hike on Thursday.
The dollar index , which tracks the currency against six peers including yen, euro and sterling, held firm, though moves were subdued, up 0.13% to 104.73, as traders awaited the U.S. consumer price index (CPI) reading for August. The release comes just a week before Federal Reserve officials gather to decide on interest rate policy.
The U.S. consumer price index likely increased by 0.6% last month, according to a Reuters survey of economists. That would be the largest gain since June 2022 and would follow two straight monthly advances of 0.2%.
The Federal Reserve is largely expected to keep rates on hold at next week’s meeting, according to CME’s FedWatch Tool. The Fed’s next move in November remains more uncertain.
“Neither the ECB nor the BoE wants to be the first to declare victory on inflation. This responsibility will probably rest on the Fed’s shoulders,” said Stephen Gallo, Global FX Strategist at BMO Capital Markets.
This is why Wednesday’s U.S. CPI has the potential to be the dominant driver for euro/dollar, he added.
The euro fell 0.2% to $1.0731 as markets raised their bets on further ECB rate hikes despite recent data showing the decline in euro zone business activity accelerated faster than initially thought last month.
Money markets are now pricing in an almost 70% chance of a 25 basis point move this week.
A source told Reuters that the ECB expects inflation in the 20-nation euro zone to remain above 3% next year, bolstering the case for a 10th consecutive interest rate increase on Thursday.
“With fresh signs of inflationary pressures, investors also moved to price in a growing chance that the ECB would in fact go ahead with another hike tomorrow,” said Jim Reid, strategist at Deutsche Bank.
Sterling slipped 0.2% to $1.2471, on track for its biggest daily drop in a week as the UK economy contracted by 0.5% in July, a worse than anticipated 0.2% contraction in gross domestic product.
YEN RETRACES GAINS
The yen fell as traders further digested comments from Japan’s top central banker on a possible early exit from its negative interest rate policy.
Influential ruling party lawmaker Hiroshige Seko on Tuesday also signalled his preference for ultra-loose monetary policy, after Bank of Japan Governor Kazuo Ueda’s comments pushed up the yen and bond yields.
The dollar advanced 0.2% against the yen to 147.39. The yen has now firmly retraced Monday’s surge, which was its biggest one-day percentage rise in two months following the remarks by Ueda over the weekend.
Data released earlier on Wednesday showed Japan’s annual wholesale inflation slowed in August for an eighth straight month, although at 3.2% it remains above the central bank’s 2% target.
The yen has come under pressure against the dollar as a result of growing interest rate differentials since the Fed began its aggressive rate-hike cycle last year while the BOJ maintained an ultra-loose monetary policy.
Since the yen weakened past the key 145 per dollar threshold last month, traders have been on alert for any signs of intervention from Japan to shore up the currency. A year ago, that level prompted the first yen-buying intervention by the authorities since 1998.