Currencies See-Saw As Inflation Data Rocks The Boat

What’s going on here?

The US dollar weakened after US inflation data for May came in flat, against an expected 0.1% rise, leading to notable movements in other major currencies.

What does this mean?

Softer-than-expected US inflation data has tilted the currency markets. The euro notched up gains, rising 0.6% to surpass its 200-day moving average at $1.0811, while the Australian dollar climbed 0.9% to $0.6662. The New Zealand dollar hit a five-month high above $0.62 before settling at $0.6183, and the British pound increased by 0.5% to $1.2798. Meanwhile, the Japanese yen edged up 0.2% but remains fragile ahead of a crucial Bank of Japan (BoJ) meeting. Despite the dollar’s decline, the Chinese yuan held steady in offshore trade, while expectations build for the Indonesian rupiah to benefit from these dynamics.

Why should I care?

For markets: Navigating the turbulent waters of forex.

Currency strategists at Westpac and BNY see a weaker US dollar due to likely Fed rate cuts. Although the Federal Reserve kept rates steady at 5.25-5.5%, they reduced projections for this year’s rate cuts from three to one. Investors are pricing in nearly two 25 basis point rate cuts, indicating market skepticism about the Fed’s projections. This discord affects forex markets, with ripple effects across global currencies.

The bigger picture: Shifts in monetary policies and global impacts.

The BoJ’s upcoming policy decision has significant implications for the yen, especially with markets anticipating a reduction in bond purchases to raise yields. The yen remains volatile, wobbling at 156.82 to the dollar and hitting multi-year lows against major currencies like the New Zealand dollar and British pound. Strategists at the Commonwealth Bank of Australia predict the BoJ might fall short, potentially pushing down Japanese interest rates and further weakening the yen, a development that could reshape global trade and investment flows.