12-7-2023 (WASHINGTON) The US dollar experienced a decline, reaching a two-month low against major currencies on Wednesday, as investors eagerly awaited a crucial US inflation report. Meanwhile, the British pound reached a 15-month high due to expectations of further interest rate hikes by the Bank of England (BoE).
The US inflation data, set to be released later in the day, is anticipated to reveal a 5% increase in core consumer prices on an annual basis for June. These figures will provide insights into the progress made by the Federal Reserve in its battle against inflation.
In anticipation of the report, the US dollar dropped to a two-month low of 101.45 against a basket of currencies. This decline continued from the beginning of the week when Fed officials hinted that the central bank was nearing the end of its current monetary tightening cycle.
Conversely, the euro slightly rose by 0.07% to $1.1018, flirting with Tuesday’s two-month peak of $1.1027.
Matt Simpson, senior market analyst at City Index, remarked, “We’re already seeing markets move in anticipation of a softer US inflation report. That runs the risk of a ‘buy the rumour, sell the fact’ reaction if the figures come in around expectations.”
On another note, the British pound surged to $1.2940, reaching its highest level in 15 months during early Asian trading. This upward trend was driven by speculations that the Bank of England will need to tighten its monetary policy further in order to manage inflation, which is currently the highest among major economies.
Recent data released on Tuesday indicated a sharp rise in British wages, with basic earnings surging 7.3% in the three months leading up to May, surpassing expectations of a 7.1% increase.
Simpson added, “The Bank of England will have their heads in their hands following the latest employment and wages figures, as it likely forces them to hike by another 50 basis points (bps) at their next meeting and have a terminal rate above 6%.”
Market analysis suggests the Bank of England may implement roughly 140 bps of rate hikes.
Meanwhile, the Japanese yen strengthened against the US dollar, surpassing the 140 per dollar mark and reaching a one-month high of 139.54. This was driven by expectations that the Bank of Japan may adjust its controversial yield curve control (YCC) policy at its upcoming meeting this month.
Jane Foley, head of FX strategy at Rabobank, stated, “Although steady policy appears to be the most likely outcome for the July policy meeting, it is widely expected to bring upgraded inflation forecasts and the market will continue to hope that the BOJ may offer some signal as to when YCC could be adjusted.”
She further noted, “Speculation of a possible tweak could allow the yen some support ahead of the BOJ meeting this month.”
In other currency news, the New Zealand dollar rose by 0.34% to $0.6219 prior to the Reserve Bank of New Zealand’s (RBNZ) monetary policy decision later in the day. However, it is widely anticipated that the central bank will maintain its current interest rates.
Susan Kilsby, an agricultural economist at ANZ, mentioned, “While we continue to see the balance of risks tilted toward the RBNZ eventually having to do more, that’s not expected to happen today.”
The Australian dollar also saw gains, increasing by 0.39% to $0.6713.
