The dollar regained some ground on Wednesday after weak U.S. retail sales data reinforced expectations of imminent Federal Reserve rate cuts. U.S. retail sales barely rose in May, and data for April was revised significantly lower, suggesting continued sluggish economic activity in the second quarter. Initially, this data pushed the dollar lower, but losses were limited as the euro, which has the largest weight in the dollar index, remained under pressure due to political uncertainty in France and the broader Eurozone.
The euro was last marginally lower at $1.0736, while the dollar index steadied at 105.28. Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia (CBA), commented, “We thought that the U.S. retail sales would be weak, and it was. It looked like the U.S. consumer was never going to slow down, but now it seems that’s exactly what has happened.”
Markets are currently pricing in a 67% chance that the Federal Reserve will begin easing rates in September, with nearly 50 basis points of cuts expected by year-end, according to the CME FedWatch tool. Meanwhile, sterling fell 0.02% to $1.2706 ahead of UK inflation data due later in the day, which precedes a Bank of England policy decision on Thursday. The BoE is expected to keep rates on hold. Capurso noted that while headline inflation will likely drop due to base effects and falling energy prices, the BoE is more concerned with services inflation, which is closely linked to wages and the labor market.
The Australian dollar outperformed against the greenback, aided by a hawkish stance from Reserve Bank of Australia (RBA) Governor Michele Bullock during a press conference following the central bank’s rate decision. The Aussie was last up 0.12% at $0.6664, extending its 0.66% gain from the previous session. Conversely, the New Zealand dollar fell 0.19% to $0.6133.
The yen remained relatively unchanged at 157.83 per dollar, pressured by significant interest rate differentials between Japan and the U.S. Minutes from the Bank of Japan’s (BOJ) April policy meeting revealed that policymakers discussed the impact of a weak yen on prices. However, this release had little market impact as investors look forward to the next BOJ meeting in July. BOJ Governor Kazuo Ueda indicated that the central bank could raise interest rates next month, depending on economic data.
Wells Fargo economists noted that while the BOJ’s outlook suggests further policy normalization, the gradual approach to reducing bond purchases and the lack of significant policy changes since lifting the policy rate in March imply that forthcoming changes will be implemented slowly.
The Australian dollar maintained its gains, while the New Zealand dollar saw a decline. The yen continued to be affected by interest rate differentials, with market attention turning to future BOJ decisions. The cautious approach of central banks and ongoing economic data will continue to influence currency markets in the coming months.
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