Dollar Defends It's Rebound: XM.com

Written by Charalampos Pissouros, Senior Investment Analyst at XM.com. An original version of this piece can be read here.

The US dollar rebounded on Thursday and is holding onto those gains today as data showed that import prices increased 0.9% month-on-month in April, taking the annual rate up to 1.1% from 0.4%.

Despite the slowdown in the CPI figures on Wednesday, the unexpected acceleration in the import price index reinforced concerns that the Fed’s fight to bring inflation to heel is not over yet and that officials could eventually delay plans to begin cutting interest rates.

From nearly fully pricing in a quarter-point reduction in September, the market now assigns an around 90% chance for such an action, while the total number of basis points worth of cuts by the end of the year was reduced back to 46 from 51 yesterday.

What may have also encouraged investors to scale back their rate cut bets may have been remarks by Fed officials suggesting that despite the slowdown in CPI inflation, there is no reason to change the stance of monetary policy now. Cleveland Fed President Loreta Mester went a step further, adding that if long-term inflation expectations also begin to increase, the Fed may need to be open to further rate hikes, although she said that this is not her base case.

Today, Fed Governor Christopher Waller and San Francisco Fed President Mary Daly will step onto the rostrum. Like Williams and Mester who spoke yesterday, both Waller and Daly are voting members and thus, should they agree with the “higher for longer” narrative, the dollar may recover a little more ground.

The yen skidded against the dollar yesterday, extending its slide today after the BoJ left the amounts of the government bonds it purchased at today’s operation unchanged, after unexpectedly reducing them at the start of the week.

This combined with remarks by BoJ Governor Ueda that they have no immediate plan to start selling their ETF holdings, as well as the latest GDP data that revealed a larger than expected contraction of the Japanese economy, may have disappointed some of those expecting the Bank to press the hike button again during the summer.

Yet, the probability for a July hike remains elevated at around 78%, but a slowdown in next week’s CPI data may bring it further down and thereby weigh more on the Japanese currency.

All three of Wall Street’s main indices closed in the red yesterday, but that was after all three of them hit new record highs. The acceleration in US import prices and the subsequent repricing of Fed expectations may have prompted equity traders to liquidate some of their positions.

Gold also pulled back yesterday, but it seems to be recovering ground today. With tensions in the Middle East flaring up again recently, it is hard for the precious metal to change course, even if the Fed sticks to its “higher for longer” strategy. After all, gold continued staying in a strong uptrend mode even while the market was reducing the number of rate cuts expected for this year from around 6 to 2.