In European trade, the dollar dipped against a basket of major currencies as US 10-year treasury yields eased ahead of the highly anticipated US inflation data for January. This crucial economic indicator is poised to reveal the extent of inflationary pressures weighing on Federal Reserve policymakers, offering fresh insights into the timing of the first US interest rate adjustment.
The dollar index retreated by 0.1% to 104.10, after briefly reaching a session high of 104.29, following a modest 0.1% gain on Monday. This pullback comes as US treasury yields declined by 0.3% on Tuesday, marking the first loss in five sessions and relinquishing recent four-week highs at 4.197%. The subdued market activity reflects traders’ reluctance to establish new positions until the release of the US inflation figures, which are poised to steer the Federal Reserve’s next policy moves.
Current market pricing indicates a 13.5% probability of a 0.25% interest rate cut by the Fed in March, with a higher likelihood of 57.5% for such a cut in May. This contrasts with earlier expectations in January, where traders anticipated six rate cuts totaling 150 basis points throughout the year. Now, forecasts have moderated to expect four rate cuts totaling 100 basis points, underscoring evolving sentiments about the trajectory of US monetary policy.
Anticipation surrounds the US inflation data, with expectations of a 2.9% year-on-year increase in consumer prices for January, a slight deceleration from December’s 3.4%. Core prices, which exclude volatile food and energy components, are also expected to moderate to a 3.7% annual growth rate from 3.9% previously. Of particular interest is the trajectory of core consumer prices, closely monitored as an indicator of progress towards the Fed’s 2% inflation target.
The market’s reaction to the forthcoming inflation figures is poised to be significant, with strong data likely dampening expectations for imminent US interest rate cuts, thereby bolstering the dollar. Conversely, weaker-than-expected inflation numbers could revive prospects for rate cuts, exerting downward pressure on the dollar.
