Dollar index steadies as Fed June rate cut still in sight

Dollar index stable as traders look to June interest rate cut in the U.S.

On Wednesday, the U.S. dollar index (DXY) remained stable as traders appeared to shrug off hotter-than-expected U.S. inflation rates, maintaining their anticipation of a Federal Reserve (Fed) rate cut in June.

The U.S. Consumer Price Index (CPI) registered a solid increase in February, exceeding predictions and pointing towards persistent inflationary pressures. Despite the CPI's 0.4% monthly increase aligning with forecasts, the year-on-year growth of 3.2% slightly surpassed the anticipated 3.1%. Core inflation figures also exceeded expectations.

This has led analysts to speculate on whether the Federal Reserve will be able to endorse more than a couple of rate cuts throughout the year.

Market sentiment currently reflects almost no chance of a Fed cut later this month, while expectations for a cut in June have dropped slightly to 67% — down from 71% earlier in the week, as per the CME Group's FedWatch Tool.

The dollar index, which tracks the strength of the greenback against a group of six major currencies, slightly fell by 0.05% to 102.90 by 12:50 GMT.

Francesco Pesole, FX strategist at Dutch bank ING, commented on the dynamics to Reuters:

"The market reaction has been very contained compared to a month ago when inflation surprised by a similar margin. It appears that the optimistic message on disinflation sent by Federal Reserve Chair Jerome Powell continues to resonate loudly with investors."

Last week, Federal Reserve Chair Jerome Powell said the central bank was “not far” from having the confidence needed in falling inflation to begin cutting rates.

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Sterling, euro show mild gains against the dollar

Meanwhile, the British pound and the euro both saw minor gains against the dollar, as recent data revealed the UK economy's return to growth in January, exiting a mild recession from the latter half of 2023.

GBP to USD saw the greenback fall by 0.02% to trade around $1.2795, while the EUR to USD pair gained 0.06% to $1.0937.

The European Central Bank (ECB) is set to disclose the results of its operational framework review later today, which has maintained interest rates at zero or below while providing banks with liquidity through bond purchases and loans.

ECB official Francois Villeroy de Galhau indicated on Wednesday that rate cuts could begin between April and June 21, as “victory” against inflation was in sight.

Dollar gains against Japanese yen on wages, Ueda comments

In other developments, the dollar gained against the yen after the Japanese currency saw its biggest fall in a month on a slightly bleak evaluation of Japan's economic outlook by Bank of Japan Governor Kazuo Ueda.

The USD to JPY pair traded around 147.96 at the time of writing on Wednesday, with the greenback up by 0.21% against the Japanese yen on the day. The yen has shed close to 5% of its value against the USD so far this year.

The focus now shifts to the forthcoming announcement of spring wage negotiation outcomes, which will be made public on Friday. The results will be crucial for the Bank of Japan's decision-making on exiting negative interest rates and bringing an end to its ultra-loose monetary policy.

With major Japanese firms agreeing to substantial pay raises, expectations seem set for bumper salary increases. The country's largest trade union confederation has demanded pay rises of 5.85% this year, surpassing 5% for the first time in 30 years.

When considering indices and forex (foreign exchange) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.

When considering shares, indices, forex (foreign exchange), and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.