US dollar weakens, euro edges higher after inflation data
THE US dollar fell against other major currencies on Wednesday (May 10) on news that US inflation slowed more than expected, increasing the likelihood that the Federal Reserve (Fed) could pause its interest rate hikes.
US Labor Department data showed April inflation cooled to 4.9 per cent, the smallest year-over-year increase in two years. However, so-called core inflation remained sticky at 5.5 per cent, suggesting interest rates may need to stay high for some time to tame it.
“The US dollar did soften modestly on the news that core US consumer price index (CPI) inflation edges a little lower in April. However, the data provides little by way of resolution for Fed hawks and doves,” said Jane Foley, head of FX strategy at Rabobank London.
“At 5.5 per cent, core CPI inflation is well above the 2 per cent target and does little to alter our house view that the Fed will be unable to cut interest rates this year.”
Following the data, the euro rose 0.24 per cent to US$1.0987 while sterling was up 0.14 per cent to US$1.2640.
The Japanese yen was last seen at US$134.50 as the US dollar slipped 0.52 per cent.
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Against a basket of currencies, the US dollar index fell 0.2 per cent to 101.38 after hitting a low of 101.21.
“There’s continued angst in the market that the Fed isn’t finished hiking rates,” said Adam Button, chief currency analyst at Forexlive.
“Even though the employment inflation report was only slightly lower than expected, you could see a sigh of relief in the market. And that meant selling the US dollar fairly aggressively. So ... I think the market has been holding its breath ahead of this report.”
Economists polled by Reuters expected core US consumer prices to rise 5.5 per cent on a year-on-year basis for April.
A stronger-than-expected reading would have proved a headache for the Fed, which signalled last week it was open to pausing its aggressive tightening cycle after delivering 10 consecutive rate hikes since March 2022.
Fed funds futures traders are pricing in a pause before expected rate cuts in September. The Fed’s target range stands at 5 per cent to 5.25 per cent.
Button believes it is far too soon to start talking about rate cuts.
“I think the market is ready to move past the inflation narrative. But what the Fed needs to see is rising unemployment before it even thinks about cutting rates,” he said.
“I think even if inflation goes down to 2 per cent, the Fed won’t cut rates until it looks like a recession is imminent or certain. So the growth part of the equation will be much more important from here for the market and for the Fed.” REUTERS
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