On Friday, the dollar displayed strength, poised to break a three-week losing streak following hotter-than-expected U.S. inflation data, which hinted at a potential delay in Federal Reserve interest rate cuts.
Market sentiment was cautious ahead of a Bank of Japan (BOJ) meeting next week, where there’s anticipation for a significant policy shift if Japanese companies offer substantial wage increases. The yen remained steady in anticipation of this event.
Bitcoin prices experienced volatility, retracting from a record high reached on Thursday, as risk sentiment dampened. The cryptocurrency was down by 4.43% at $67,541.00.
Recent data indicated a notable increase in the U.S. producer price index for final demand in February, surpassing economists’ forecasts. This followed strong consumer price increases reported earlier in the week. Investors are closely monitoring the upcoming Federal Reserve meeting, particularly for insights from Fed Chair Jerome Powell and the interest rate forecast, or dot plot.
Sticky inflation reports have prompted traders to revise their expectations, with markets now pricing in a 60% chance of Fed rate cuts in June, down from 74% the previous week. This underscores the potential challenges in addressing inflationary pressures, possibly leading to a delay in interest rate cuts.
Traders are currently pricing in 76 basis points of cuts for the year, aligning more closely with the Fed’s projection in December, which indicated three rate cuts for 2024.
The dollar index, gauging the U.S. currency against six peers, showed a 0.068% increase to 103.45, following a 0.55% rise on Thursday. This sets the index on course for a 0.7% weekly gain, its first in four weeks.
Meanwhile, the yield on 10-year Treasury notes slightly eased by 1.3 basis points to 4.285% after experiencing a notable increase of up to 10.6 basis points on Thursday.
The yen remained relatively unchanged at 148.32 per dollar and is poised for a 0.8% weekly decline, marking its most substantial weekly drop since January. Speculation surrounds the Bank of Japan’s (BOJ) potential departure from eight years of negative interest rate policy, with internal preparations for an exit reportedly underway since Kazuo Ueda assumed the role of BOJ governor last year, according to sources familiar with the bank’s plans as reported by Reuters.
“A strong shunto wage outcome is widely seen as the last piece of the puzzle that will prompt the BOJ to unwind its ultra-easy monetary policy settings,” remarked Carol Kong, a currency strategist at Commonwealth Bank of Australia.
Preliminary results from Japan’s spring wage negotiations are expected on Friday, with several major companies in the country already agreeing to meet union demands for pay hikes.
Market sentiment is increasingly leaning towards the notion that the BOJ will proceed with its policy adjustment, whether in March or April, according to Moh Siong Sim, currency strategist at Bank of Singapore. The yen has gained 1% against the dollar thus far in March.
Elsewhere, the Australian dollar dipped by 0.18% to $0.6569, while the New Zealand dollar declined by 0.53% to $0.6099.
The euro saw a marginal decline of 0.04% to $1.0875, while sterling weakened by 0.15% to $1.2735 ahead of the Bank of England’s policy meeting scheduled for the following week. Both currencies hovered near their lowest levels in a week.