Dollar pulls back as US CPI data take center stage

Dollar retreats ahead of CPIs and Fed

The US dollar traded lower or unchanged against the other major currencies on Monday except the Japanese yen, which continued to slide. Today, the greenback is trading on the back foot against all, with the yen recovering a decent portion of its Monday losses.

Dollar traders are likely sitting on the edge of their seats in anticipation of the US CPI numbers, just a day before the Fed announces its last monetary policy decision for the year. The headline rate is forecast to have ticked down to 3.1% y/y from 3.2%, and the core one to have held steady at 4.0% y/y.

On Friday, the US jobs report beat estimates on all fronts, prompting market participants to push back their rate cut expectations. The probability for a first quarter-point reduction to be delivered during the first quarter of the new year is now that of a coin toss, but a May cut is a certainty in the eyes of the market. Under normal circumstances, a further slowdown in inflation could have tempted some participants to bring forth their cut bets again, but with the core rate holding at double the Fed’s objective and the Committee announcing its policy decision on Wednesday, they may avoid bold changes.

They may be more eager to find out what’s the new rate path projected by the Fed for the new year and what Fed Chair Powell has to say at the press conference. When he last spoke, he did not close the door to another hike and refrained from discussing rate reductions. However, given that Powell pays close attention to inflation expectations, and that the calculations of the 1-year expectations from both the University of Michigan and the New York Fed suggest further softening, it would be interesting to see whether Powell has leaned to a more dovish stance or not.

Yen remains sensitive to headlines about the BoJ’s plans

Following the Reuters report on Friday that Governor Ueda’s latest remarks on policy-exit options were not intended to hint at a potential exit timing, another report came to hurt the yen on Monday. This time it was a Bloomberg report saying that the BoJ sees little urgency to end negative interest rates this month.

The sources cited added that BoJ officials are of the view that the potential cost of waiting for more information to confirm solid wage growth is not very high. This could mean that the BoJ’s upcoming gathering is unlikely to hint at an imminent shift and may just be a reiteration of the stance revealed last time.

Having said that though, the yen is holding top spot today against the other major currencies, suggesting that dollar/yen may be among the most volatile pairs after the Fed announces its decision.

Wall Street extends rally, gold slides despite softer dollar

Wall Street continued marching north on Monday, with all three of its main indices closing at new highs for the year. Although Friday’s better-than-expected jobs data prompted investors to push back their rate cut bets, equities may have remained in an upside trajectory due to the data reviving hopes of a soft landing for the US economy. Decelerating inflation, expectations of lower rates, and reduced fear that the economy could fall into recession appear to be a positive blend for the stock market.

Gold lost more than 1% yesterday, despite the US dollar pausing its rally ahead of the upcoming key events. Perhaps the precious metal is still correcting its prior rally that led it to new record highs. Nonetheless, calling for a bearish reversal is still premature as should investors continue to anticipate several rate cuts by the Fed next year, the current retreat may encourage them to buy gold again at a better price with a better risk-to-reward outlook.