The US dollar tumbled on Wednesday (Jun 12) after data showed that consumer prices in May rose less than economists expected, adding to bets that the Federal Reserve may begin cutting interest rates as soon as September.
Headline inflation was flat on the month, below expectations for a 0.1 per cent gain. Core prices rose by 0.2 per cent, below economists’ projections for a 0.3 per cent increase.
“(The report) should provide the FOMC (Federal Open Market Committee) with some degree of further confidence in the disinflationary process back towards the 2 per cent target,” said Michael Brown, market analyst at Pepperstone in London.
Fed funds future traders are now pricing in a 73 per cent probability of an interest rate cut by September, up from 53 per cent on Tuesday, according to the CME Group’s FedWatch Tool.
“That September meeting is now live again,” said Helen Given, FX trader at Monex USA in Washington, DC.
The odds of a second rate cut by year’s end also increased.
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“(Now) traders expect two interest rate cuts this year. That’s a pretty remarkable shift from even yesterday’s pricing,” Given said.
Investors had pared back expectations of rate cuts after Friday’s jobs report for May showed that employers added more jobs than expected during the month, while wage inflation also rose more than was anticipated.
Investors will next focus on the Fed’s statement when it concludes its two-day meeting later on Wednesday. The key focus will be updated economic and interest rate projections by Fed officials.
This is likely to now reflect an expectation of two interest rate cuts this year, down from the median projection of three cuts when the estimates were last released in March.
Fed policymakers have said that they will want to see several months of improving inflation before cutting interest rates.
But Wednesday’s data may give Fed chair Jerome Powell “a bit of ground to lean a little more dovish than he could have previously. And that’s been a trend we’ve seen from him this year,” said Given.
The dollar index was last down 0.83 per cent on the day at 104.39. It had reached a four-week high of 105.46 on Tuesday.
The euro gained 0.82 per cent to US$1.0827, after dropping to US$1.07195 on Tuesday, the lowest since May 2.
The single currency has been under pressure after far-right parties gained ground in European Parliament elections, prompting French President Emmanuel Macron to call a snap election in his country, to be held in two rounds on Jun 30 and Jul 7.
Macron reaffirmed on Wednesday that he would not resign if his camp does not win the election. Marine Le Pen’s National Rally is France’s most popular party ahead of the parliamentary elections.
The Bank of Japan also meets this week, and it is widely expected to keep interest rates steady and consider whether to offer clearer guidance on how it plans to reduce its huge balance sheet.
The dollar fell 0.71 per cent to 155.95 yen, after trading at a one-week high of 157.40 on Tuesday.
The yen’s decline to a 34-year low of 160.245 per dollar at the end of April triggered several rounds of official Japanese intervention totalling 9.8 trillion yen (S$85 billion).
In cryptocurrencies, Bitcoin gained 2.88 per cent to US$69,202. Reuters
