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US inflation shifts Fed bets
The dollar’s advance stalled on Thursday after US inflation came in benign, with US consumer prices increasing 0.1% in July, in line with economists’ expectations.
“US consumer prices increased 0.1% in July”
Traders pared back bets for a near-term Federal Reserve interest rate hike, with money markets reducing the odds of a September rate hike to 40% from 54% a week ago, according to CME Group’s FedWatch.
Michael Wan, a currency strategist at MUFG, said the Fed’s dilemma is weighing inflation risks against a softening labor market, adding that the FOMC is likely to maintain a restrictive holding pattern in September rather than pivot towards a hike.
The dollar changed hands at 159.35 yen, close to the 160 level some market participants see as a line in the sand after the rare joint US-Japan intervention that pulled the exchange rate down from near a four-decade peak close to 164 to 155.20 over three days.
Shusuke Yamada of Bank of America said a break above 160 would likely be interpreted as limited policy resolve, while successful intervention that pushes USD/JPY below 155 would strengthen perceptions of strong commitment.
Fed policy meets labor
Wan said the Fed now faces a dilemma after weaker-than-expected July payrolls, released last Friday, as traders reassess the balance between inflation risks and a softening labor market.
He argued in a note that the FOMC is likely to maintain a restrictive holding pattern in September rather than pivot towards a hike.
The same report said the dollar index was flat at 99.976 on Thursday but on course for a 0.4% weekly rise, even as the greenback was little changed against the yen in Asia’s afternoon.
It also tied market expectations to the FedWatch probability shift, noting the September rate-hike odds fell to 40% from 54% a week ago.
The report added that investors could judge authorities’ commitment to defending the yen through dollar-yen price action and the policy response that follows.
US-Japan intervention and markets
The report described how the dollar pair had been pulled down by a rare joint US-Japan intervention that saw the dollar plummet to a three-month low.
“following recent joint US-Japan intervention”
It said the action helped pull the exchange rate down from near a four-decade peak close to 164 to 155.20 over the course of three days.
Yamada said confidence in Japan’s commitment to defending the yen improved after coordinated intervention with the US on July 31, but that credibility appeared to have eroded as USD/JPY rebounded without any intervention over the past week.
The same market wrap put the euro little changed at $1.1525 and sterling edging down 0.04% to $1.3491 ahead of a slew of UK data due later in the day, including GDP.
It also noted bitcoin was slightly higher at around $63,883 as traders digested the US inflation reading and the revised Fed-hike odds.
