US dollar drifts lower, market consolidates gains post-inflation data
The dollar experienced a slight decline on Wednesday, following a previous rise driven by higher-than-expected U.S. inflation data. Investors took a moment to consolidate gains ahead of upcoming economic data that could provide insights into the Federal Reserve's potential timing for interest rate cuts this year.
During afternoon trading, the dollar index, which gauges the dollar against a basket of currencies, slipped 0.1% to 102.85. Despite recording its largest weekly decline since January recently, the greenback has still seen gains of 1.5% this year.
Analysts suggest that the trajectory of the dollar index heavily relies on expectations of Federal Reserve easing. Concerns have emerged in recent weeks that Fed rate cuts might be delayed until 2025 or that inflation could accelerate, leading to potential rate hikes. This uncertainty has revived fears of a scenario where the U.S. economy avoids recession but experiences above-trend growth and inflation, termed as 'no landing' fears.
With the U.S. economy consistently surpassing expectations, there's a prevailing bias towards dollar strength, although fluctuations may occur.
Markets are concerned about the possibility of persistent inflation. The U.S. consumer price index (CPI) for February exceeded forecasts, indicating some resilience in inflation. Although the 0.4% rise in CPI matched expectations, the year-on-year increase of 3.2% slightly surpassed forecasts of 3.1%, with core figures also outperforming estimates.
Despite expectations of no Fed rate cuts before summer, the likelihood of rate cuts in June has only slightly decreased, standing at around 67%. The Fed is anticipated to maintain steady rates at its upcoming meeting.
Investors are eagerly awaiting Thursday's U.S. retail sales data, producer prices index (PPI) report, and jobless claims for further insights into the economy's trajectory.
Meanwhile, traders are closely monitoring spring wage negotiations in Japan.
