The dollar was strong on Monday before a busy week full of important data releases that may offer more hints about the outlook for interest rates around the world, among which the US inflation reading will likely take center stage.
The preferred inflation indicator used by the Federal Reserve, the core personal consumption expenditures price index, is expected to rise by 0.4% on a monthly basis when it is released on Thursday.
This week's data schedule also includes PMI readings in China, a rate announcement from the Reserve Bank of New Zealand (RBNZ), and inflation figures from the euro zone, Australia, and Japan.
The euro slipped 0.04% to $1.0817 before the releases, and the New Zealand currency dropped 0.55% to $0.6164 as the dollar moved broadly higher during early Asia trade.
Due in part to widespread dollar weakness and the possibility of an RBNZ rate hike on Wednesday, the kiwi gained 1.2% last week. Futures suggest a roughly 30% possibility of a 25 basis point increase, even though most analysts anticipate the central bank to maintain current rates.
According to a currency strategist from the Commonwealth Bank of Australia (CBA), Carol Kong, with markets unwinding pricing for a near-term rate increase, the RBNZ will maintain the official cash rate (OCR) steady, which would probably lead to a decline in the value of the kiwi. However, as the RBNZ is expected to stay rather hawkish, any declines in the kiwi will probably be fairly small.
The Australian dollar declined 0.07% to $0.6559, while sterling remained unchanged at $1.2671.
Inflation Conundrum
Tuesday is when data on consumer prices across Japan is expected to be released. It is anticipated that core inflation decreased to 1.8% annually in January, the lowest level since March 2022.
That would make it more difficult for the Bank of Japan (BOJ) to carry out its plans to stop negative interest rates in the upcoming months, which would keep the yen weaker in the near future.
The Japanese yen last traded at a slightly higher rate of 150.40 per US dollar after declining by over 6% against the US dollar this year because of the wide differences in the interest rates between Japan and the US.
According to Jane Foley, the head of FX strategy at Rabobank, since the end of last year, the market has been expecting the BOJ's policy meetings in March or April, as they will likely end the BOJ's negative interest rate policy.
The public's enthusiasm for the pace of monetary policy tightening by the BOJ will have been somewhat dampened by the news that Japan entered a technical recession in the second half of 2023.
According to the most recent data from the US Commodity Futures Trading Commission, short holdings on the yen reached their highest level since November last week, at almost $10 billion.
On the other hand, a string of unexpectedly high US producer and consumer prices in recent weeks has maintained the risks of Thursday's core PCE price index data skewed higher, which could further postpone expectations for a wave of Fed rate cuts this year.
