Dollar Steady, Sterling Gains After UK Inflation Data
The drop in annual inflation from April's 2.3% to May’s target of 2% was expected and marked a significant decline from the 41-year high of 11.1% reached in October 2022. The U.S. dollar steadied on Wednesday after overnight losses, while sterling edged higher following the first return of U.K. inflation to the Bank of England’s (BoE) target in nearly three years.
At 04:25 ET (08:25 GMT), the Dollar Index, which monitors the greenback against a basket of six other currencies, traded marginally higher at 104.885, having dipped to 104.762 the previous session.
Dollar Stabilizes
The U.S. currency regained some stability on Wednesday after prior weakness, rising slightly last month. This slight rise hints at ongoing challenges in consumer spending despite cooling inflation pressures.
“The reading aligns with our view that consumer spending in the U.S. has peaked and will likely lead to a broader slowdown in growth momentum in the second half of the year,” said analysts at ING.
The Federal Reserve recently kept its benchmark interest rate in the 5.25%-5.50% range but also updated economic forecasts, reducing expectations for rate cuts this year to one, down from the three anticipated in March.
However, market predictions now show a 67% chance that the Fed will start reducing rates in September, according to the CME FedWatch tool, with almost 50 basis points worth of cuts expected for the rest of the year.
Trading volumes are expected to be limited Wednesday due to U.S. investors celebrating the Juneteenth holiday.
Sterling Edges Higher After Inflation Data
Sterling rose 0.2% to 1.2728 after data revealed U.K. inflation hit the BoE’s 2% target in May for the first time in nearly three years.
The annual decline from April's 2.3% was anticipated and marked a sharp reduction from the 41-year high of 11.1% in October 2022. The BoE will hold its latest policy meeting on Thursday.
“The Bank won't cut rates during its meeting tomorrow. However, we still have another report in July. Unless that's a significant surprise, we suspect the BoE will still be on track for a rate cut in August,” ING added.
Euro Feels Political Pressure
The euro fell 0.1% to 1.0735, weighed down by political tensions in France and the wider eurozone.
“EUR/USD has stabilized but lacks momentum for a meaningful rebound due to lingering political risks and fiscal concerns weighing on the common currency,” ING said.
Aussie Gains on Hawkish RBA Stance
In Asia, the yen traded 0.1% lower at 157.77, with minutes from the Bank of Japan's (BOJ) April policy meeting showing a debate among policymakers about the impact of a weak yen on prices.
The release had little market impact as investors look ahead to the BOJ meeting in July.
The yuan traded 0.1% higher at 7.2569, while the Australian dollar rose 0.3% to 0.6672 following a hawkish stance from RBA Governor Michele Bullock in a press conference after the central bank's rate decision.
