The dollar steadied against a basket of currencies on Friday after softer-than-expected inflation data caused the greenback to drop to one-month lows. This decline has heightened expectations that the Federal Reserve will cut interest rates in September.
Broader foreign exchange markets remained cautious, particularly due to volatility in the Japanese yen. The yen strengthened significantly late Thursday, leading to speculation about possible intervention by the Japanese government.
The euro showed minimal movement against the dollar. German wholesale price index inflation data for June was slightly weaker than anticipated, keeping the EUR/USD pair steady after it surged to a one-month high on Thursday.
Similarly, the British pound remained flat. The GBP/USD pair maintained its position after reaching a near one-year high against the dollar on Thursday, buoyed by data indicating stronger-than-expected growth in the British economy for May.
Dollar Near One-Month Low as Soft CPI Data Spurs Rate Cut Bets
The dollar index and dollar index futures stabilized on Friday after plummeting to a one-month low in overnight trading.
The dollar faced pressure due to softer-than-expected Consumer Price Index (CPI) data, which indicated inflation cooled slightly more than expected in June. This reading increased the likelihood that the Federal Reserve will feel confident enough to begin cutting interest rates.
Traders are now pricing in an 83.4% chance that the Fed will cut rates in September, up from 64.7% last week, according to the CME FedWatch Tool.
Japanese Yen Volatile After USD/JPY Tumbles; Intervention Speculation Rises
The Japanese yen exhibited volatility in Friday trading, with the USD/JPY pair rising 0.2% to about 159.18 yen.
The pair fell over 2% on Thursday following the soft U.S. CPI report, dropping from levels near a 38-year high reached earlier in July.
The sharp drop in the yen has raised questions about whether the Japanese government intervened in the currency markets. Officials have provided limited information on the matter despite issuing several warnings recently about betting aggressively against the yen.
Data from the Bank of Japan’s balance sheet, due later in July, is expected to shed more light on potential government intervention. Traders also speculated that short positions on the yen might have been squeezed by the dollar’s decline following the weak CPI reading for June.
Analysis and Market Implications
The latest CPI data suggest that inflationary pressures are easing, which could lead to more accommodative monetary policy from the Federal Reserve. This has significant implications for the currency markets, particularly for the dollar, which could face further downside if rate cut expectations continue to build.
The potential intervention by the Japanese government indicates a proactive approach to stabilize the yen, reflecting broader concerns about the currency’s weakness and its impact on the economy. Investors should closely monitor upcoming data releases and official statements for further cues.
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