The dollar rose on Thursday, recouping some of the previous day’s losses after the Federal Reserve forecast a single rate cut this year, although softer-than-expected U.S. inflation tempered some of those gains.
The yen remained under heavy pressure ahead of Friday’s Bank of Japan meeting and traders braced for further volatility in the currency.
Price action in the foreign exchange market was relatively subdued on Thursday, compared to the previous day, when the dollar fell almost 1% at one point following the release of consumer price index data ( CPI), before ending the day with a loss of 0.5%, which is still the largest in two weeks.
Consumer prices in the United States remained unchanged in May compared to April, compared to market expectations of a 0.1% increase.
“I think the CPI reaction was a bit overblown. It was almost a relief that it wasn’t worse. And that’s what caused such a strong knee-jerk reaction,” said Fiona Cincotta, market strategist at City Index.
“We saw the dollar’s massive sell-off retreat upon hearing the Fed news and today it is also trending upward. In the cold light of day, perhaps that impression of inflation was not as ‘refreshing’ as the market initially was.” read in it,” he said.
Inflation rose at an annual rate of 3.4%, still well above the Fed’s 2% target.
Later on Wednesday, the Federal Reserve kept the funds rate at 5.25-5.5% and policymakers’ median projection for the number of cuts this year fell to just one, down from three in March.
Despite the Federal Reserve’s projections, markets stuck to forecasting nearly two 25 basis point rate cuts this year, helping to reverse some of the dollar’s losses.
“Markets see the dollar weakening, with swings in between,” said Imre Speizer, a strategist at Westpac in Auckland. “That’s (mostly) due to the Fed’s rate cuts, which are still in the cards for this year.”
The euro experienced its biggest one-day rise in 2024 on Wednesday, following the US inflation figures. The European single currency has been subject to intense volatility this week, shaken by political uncertainty in France, where a poor result in the European Union elections led French President Emmanuel Macron to call an early vote.
The euro, which touched six-week lows earlier this week, was flat on the day around $1.08, having risen 0.64% the previous day. The derivatives market shows that the premium that traders will pay for the option to sell the euro, rather than buy it, has grown to its highest level since April.
Sterling, which also faces political risk from the upcoming British general election on July 4, was flat at $1.2795, having gained 0.5% the day before.
US Federal Reserve Chairman Jerome Powell maintained a familiar tone in his press conference, stressing that policymakers would be sensitive to economic data. Although fewer cuts were expected for this year, policymakers had them planned for 2025 or 2026.
Still, it was cold comfort for the yen, which is fighting bearish momentum while the gap is so wide between near-zero Japanese rates and much higher short-term U.S. rates.
The Bank of Japan concludes a two-day policy meeting on Friday and markets are awaiting some kind of announcement or signal that the bank will reverse massive bond purchases to allow further rises in Japanese yields.
That leaves the yen vulnerable to disappointment. It was last trading at 157.23 per dollar and on the back foot at the crosses – where it touched a 17-year low of 97.06 per kiwi overnight and a 16-year low of 200.91 per pound.
Overnight options implied volatility, a measure of trader demand for protection against big currency swings, rose to its highest level in six weeks.
