Dollar gains ground ahead of key inflation data

Core PCE index the dollar’s next test

The US dollar traded somewhat higher against most of the other major currencies on Friday, losing some ground only against the pound, the aussie and the kiwi. The greenback began the new week higher or virtually unchanged, gaining the most ground against the kiwi.

With no clear catalyst to drive the dollar higher on Friday and no top-tier US data on today’s agenda, some traders may have decided to initiate new long positions due to the latest correction offering more attractive entry points.

Considering that inflation in the US is proving stickier than expected and the US economy seems to be faring better than its major counterparts, last week’s slide may have just been the result of profit taking rather than a change in the market’s outlook and this is evident by the fact that according to Fed funds futures, investors continue to price out some basis points worth of rate cuts by the Fed. They are currently anticipating 85bps worth of reductions by the end of this year, while the probability for the first quarter-point cut to be delivered in June has fallen to around 80%.

That probability could go even lower if this week’s data, including the core PCE index and the ISM manufacturing PMI, continue to suggest that inflation is not cooling as fast as previously expected and that the US economy is performing well at a time when others have already slipped into recession.

Kiwi pulls back ahead of RBNZ decision

The main loser today is the New Zealand dollar even though investors’ bets with regards to the RBNZ’s future course of action have not changed. They continue to assign a 30% chance for a 25bps hike at Wednesday’s decision, with that probability rising to around 60% in May.

The risk-linked currency has staged a strong recovery lately in anticipation of a more hawkish stance by the RBNZ, but just a couple of days ahead of the decision, traders may have decided to realize some of their winnings, as with a 30% chance of a hike, the risk of a deeper slide in case of no action seems to be elevated.

However, even if the Bank refrains from pushing the hike button, any post-decision declines in the kiwi could remain limited and short-lived. With inflation well above the upper bound of the RBNZ’s 1-3% target range, officials could maintain their tightening bias, which could allow some more kiwi buying soon in anticipation of a hike at one of the upcoming gatherings.

The yen continued trading in a consolidation mode near the 150.50 per dollar zone, with traders perhaps awaiting tonight’s inflation data from Japan. A further slowdown in the CPIs could complicate the BoJ’s plans to take interest rates out of negative territory in the coming months, and perhaps keep the yen under pressure.

As earnings season winds down, Wall Street could turn to Fed again

On Wall Street, the S&P 500 climbed to a new record high on Friday perhaps on continued optimism over Nvidia’s astounding earnings results, with the tech giant briefly exceeding $2 trillion in market value for the first time. However, the index lost steam later, closing the session virtually unchanged, while the tech-heavy Nasdaq ended with losses.

This likely suggests that as the earnings season winds down, market participants are slowly turning their attention back to monetary policy and anything corroborating the view that Fed officials are not in a rush to start cutting interest rates anytime soon could result in a corrective retreat.