Dollar turns slightly defensive, inflation data next key test

By Dhara Ranasinghe

LONDON (Reuters) – The greenback turned defensive towards different main currencies on Tuesday, with merchants reluctant to push the dollar greater with out additional indicators that one other aggressive rate of interest hikes from the Federal Reserve was coming in September.

U.S. inflation information on Wednesday was shaping up as the subsequent key check for the greenback, which rose sharply after Friday’s unexpectedly robust jobs report fuelled bets on one other 75 bps Fed price hike.

However the foreign money has pulled again since and in skinny summer season markets, succumbed to some gentle promoting strain on Tuesday.

At 1050 GMT, the euro was up round 0.35% at $1.0226, sterling gained 0.2% to $1.2102, whereas the greenback slipped 0.1% to 134.86 yen.

That left the greenback index, which measures the foreign money’s worth towards a basket of different friends, 0.2% decrease at 106.15. It held under a greater than one-week peak hit on Friday at 106.93.

“I am a bit involved about inflation tomorrow. The market has been wrong-footed all yr and if we get a powerful core inflation print that can nail expectations for a 75 bps price hike in September,” mentioned Kenneth Broux, a foreign money strategist at Societe Generale in London.

“It is too quickly to say it is time to quick the greenback because the Fed could need to do extra.”

The Fed hiked charges by a hefty 75 bps in June and July. Cash-market futures present merchants see a few two-thirds likelihood of a 75 bps hike subsequent month and have began pushing expectations for price cuts deeper into 2023.

Economists polled by Reuters see year-on-year headline inflation at 8.7% – extremely excessive, however under final month’s 9.1% determine. The Fed targets inflation at 2%.

Heightened expectations for aggressive near-term hikes, have pushed short-dated Treasury yields additional above long-term friends.

The hole between two and 10-year Treasury yields, a dependable recession indicator, has grown to its largest in twenty years. [US/]

“The U.S. yield curve is inverted, suggesting recession down the road. However fairness markets look as in the event that they imagine the Fed goes to cease quickly and begin slicing in 2023,” mentioned Mizuho senior economist Colin Asher.

“I feel tomorrow’s CPI information will recommend the Fed is just not going to cease, which to me suggests weaker fairness markets forward which can restrict any dip within the greenback within the subsequent few months.”

The greenback’s haven standing, although, makes the dollar’s response just a little more durable to foretell, particularly as development and geopolitical worries swirl.

China prolonged army drills close to Taiwan, and the self-ruled island’s international minister mentioned China was utilizing the drills launched in protest towards U.S. Home Speaker Nancy Pelosi’s go to as an excuse to arrange for an invasion.

Elsewhere, the New Zealand greenback was regular at $0.6289, whereas Australia’s greenback was a contact softer at $0.6977.

(Reporting by Dhara Ranasinghe; Extra reporting by Tom Westbrook in Singapore, Enhancing by Alex Richardson and David Evans)