The dollar was steady on Monday as a holiday in most major Asian markets subdued the start of what could turn into a busy week, with all eyes on U.S. inflation data for clues on when the Federal Reserve may start to cut rates.
The euro was down a whisker at $1.0778, edging off a 10-day high touched in early trading after the past week saw a small bounce back after steady declines in 2024. A reading of the euro zone’s economic growth in the fourth quarter on Wednesday could offer fresh direction.
The pound was flat at $1.2632, though the Japanese yen strengthened a fraction to 149.04 per dollar as the approaching release of U.S. CPI data for January on Tuesday capped moves.
Changing expectations of when and how quickly central banks will cut interest rates as inflation falls are a significant driver of currency markets at present.
Strong jobs data earlier this month has largely taken a March Federal Reserve rate cut off the table, with markets currently seeing a move in May as more likely than not.
Analysts expect U.S. core CPI to come in at 0.3% month on month in January, but a still elevated 3.8% year on year.
Carol Kong, currency strategist at Commonwealth Bank of Australia, noted that Fed rates setters are saying they want more evidence that inflation will stay near the 2% target before considering a cut.
“Persistently near-target inflation and/or a weakening labour market would give (them) that evidence,” she said, adding that Tuesday’s data is unlikely to be sufficient to cause a large fall in the dollar.
On Wednesday, a reading of British CPI inflation will similarly influence opinion on when the Bank of England will start to cut interest rates – it is currently seen lagging the Fed and European Central Bank.
Markets are also keeping an eye on the highly rate-sensitive Japanese yen, which strengthened sharply late last year as markets priced in early U.S. rate cuts, but has since weakened as that timing got pushed back.
Japanese Finance Minister Shunichi Suzuki said on Friday that authorities were closely watching FX moves.
Dollar/yen is likely to be driven mainly by U.S. developments in the near future, but intervention warnings are likely to increase in frequency around the 150 level,” said Barclays analysts in a note.
Japanese authorities intervened in late 2022 to prop up the yen, which weakened to as much as 151.94 per dollar.
