“Essentially to me, the challenge here is inflation expectations are well anchored across the spectrum … ultimately traders will look through this and we will see a bit of a reversal in the trend that we are seeing right now.” The greenback has climbed more than 8% this year as investors have gravitated towards the safe haven on concerns about the Fed’s ability to tamp down inflation without causing a recession, along with worries about slowing growth arising from the war in Ukraine and rising COVID-19 cases in China. Still, the dollar was choppy in the wake of the data as it retreated from its session high and last fell 0.029% at 103.890, with the euro down 0.07% to $1.052. After the Fed raised its benchmark overnight interest rate by 50 basis points last week, the largest hike in 22 years, investors have been attempting to assess how aggressive the central bank will be. Expectations are completely priced in for another hike of at least 50 basis points at the central bank’s June meeting, according to CME’s FedWatch Tool https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html?redirect=/trading/interest-rates/fed-funds.html.
The dollar fell on Wednesday after economic statistics revealed that inflation remained strong, but the Federal Reserve is unlikely to change its monetary policy stance. The consumer price index increased 0.3 percent last month, the weakest increase since August, according to the Labor Department, compared to a 1.2 percent month-to-month increase in March, the highest increase since September 2005. CPI rose 8.3 percent on an annual basis, higher than the 8.1 percent forecast but lower than the 8.5 percent seen the previous month. The data suggested that inflation had peaked, but that it was unlikely to fall fast and disrupt the Fed’s current monetary policy tightening objectives. The dollar index, which had touched a four-session low of 103.37 ahead of the report, immediately strengthened to a session high of 104.13 following the data, just below the two-decade high of 104.19 reached on Monday. “Hope springs eternal here but at the end of the day markets are correct in thinking these inflation pressures are ultimately transitory, that we should see a diminishment in supply chain issues and demand as well for the coming months,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.
Atlanta Fed President Raphael Bostic said on Wednesday that rising interest rates on home mortgages, U.S. Treasury bonds and other credit instruments show the central bank remains credible in its attempts to thwart rising inflation. Investors will get another look at inflation data on Thursday in the producer price index for April, with expectations of a monthly increase of 0.5% versus the 1.4% jump in March. On an annual basis, expectations are for a jump of 10.7% compared with the 11.2% surge the prior month. The euro gained as European Central Bank has firmed up expectations that it will raise its benchmark interest rate in July for the first time in more than a decade to fight record-high inflation, with some policymakers even hinting at further hikes after the first. The Japanese yen strengthened 0.48% versus the greenback at 129.79 per dollar, while sterling was last trading at $1.2258, down 0.52% on the day. In cryptocurrencies, bitcoin last fell 3.88% to $29,797.31, after falling below $30,000 for the first time since July on Tuesday. Ethereum last fell 6.79% to $2,168.69.A
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