US dollar firm as traders await Fed clues; sterling steadies

THE greenback rose on Wednesday (May 22) as investors awaited Federal Reserve meeting minutes for insight into the central bank’s interest rate path, while the pound steadied after climbing on data showing UK inflation fell in April.

Investors have been shoring up US rate cut bets after a milder inflation reading last week, even as Fed officials have continued to sound a cautious note.

Fed governor Christopher Waller on Tuesday said he would need to see several more months of good inflation data before he would be comfortable supporting rate cuts.

That timeline was echoed by Cleveland Fed president Loretta Mester.

“Today’s FOMC (Federal Open Market Committee) minutes provide a key insight into Fed thinking earlier in the month, with traders keen to gauge whether the September cut currently being priced in looks likely or not,” said Joshua Mahony, chief market analyst at Scope Markets.

The Fed minutes from its Apr 30-May 1 meeting due later in the day may reflect more concern about higher-than-expected US inflation in the first quarter, as the meeting was held before last week’s consumer price inflation report.

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While markets remain hopeful that US inflation will continue to cool, personal consumption expenditures data due on May 31 will be a crucial test, analysts said.

The US dollar index was 0.26 per cent higher against a basket of currencies at 104.91, touching a one-week high and bobbing above a five-week low of 104.07 touched last week.

Bank of England June cut fades

The pound steadied after jumping following UK inflation data, which did not slow as much as expected but neared the Bank of England’s (BOE) target in April, prompting investors to pull bets on a rate cut next month.

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UK inflation falls less than expected, dashing June rate cut hopes

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British consumer prices rose by 2.3 per cent in annual terms in April, slowing from a 3.2 per cent increase in March. The BOE and economists polled by Reuters had forecast an annual rate of 2.1 per cent.

Money markets now see only a 15 per cent chance of a rate cut in June, according to LSEG data. Earlier this week, pricing in derivatives markets suggested traders saw a 55 per cent chance of a first cut coming in June.

Sterling edged 0.06 per cent lower to US$1.2702, after touching a two-month high of US$1.2761. The euro fell against the pound to two-month lows and was last down 0.23 per cent on the day at 85.21 pence.

Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets in London, said the inflation data-induced rate repricing looked overdone.

“We would be mindful of GBP rallies proving to be short-lived, as the immediate move in rate cut expectations appears overdone, not least should tomorrow’s flash service PMI reading reveal signs of consumer fatigue,” he said.

Elsewhere, the Reserve Bank of New Zealand left its benchmark cash rate at 5.5 per cent as expected, but lifted its forecasts for peak interest rates at its latest monetary policy meeting as inflation stays stubbornly high.

It now sees rates peaking at 5.7 per cent at the end of 2024, compared with 5.6 per cent three months ago.

The New Zealand dollar jumped as high as US$0.6152, its highest since Mar 14. It was last up 0.25 per cent versus the greenback at US$0.6106.

Fears of currency intervention by Tokyo still had traders on alert after suspected rounds of intervention earlier this month.

Against the yen, the US dollar rose 0.26 per cent to 156.61. The yen was little changed after data showed Japan’s exports rose 8.3 per cent in April from a year earlier.