Dollar stabilizes after keen CPI-driven decline; the euro gives back part of the profits

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Investing.com – The U.S. dollar strengthened in European trade on Thursday after falling to multi-week lows overnight following a milder U.S. inflation report that brought renewed attention to Fed rate cuts.

At 04:25 ET (08:25 GMT), the dollar index, which tracks the dollar against a basket of six other currencies, was trading 0.1% higher at 104.285, after falling to a five-week low just below 104 in night.

The dollar depreciates after key inflation data

The dollar remains on the defensive after the latest U.S. inflation data raised expectations that there will be two interest rate cuts this year, likely starting in September.

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Wednesday rose 0.3% in April, below the expected 0.4% gain, a relief for markets after volatile first-quarter consumer prices led to a keen deceleration in rate cut bets and even raised some concerns before an additional raise.

The data also sent U.S. Treasury yields to six-week lows as investors reassess the likely path of Fed monetary policy.

“Markets are paying more attention to encouraging news from two days of inflation data, which caused the dollar to all but erase gains after CPI disappointment in mid-April,” ING analysts said in a note.

Many Fed speakers will express their views later in the session, but it’s likely that investors will need concrete evidence if interest rate cut expectations are to change dramatically from here on out.

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“Our preferred call at this stage is not for the dollar to continue falling through the end of May, but instead for a period of silent trading with little sense of direction and low volatility. This is largely because demanding data is needed to meaningfully move the needle on Fed prices, and the next key release – core PCE – won’t occur until May 31,” ING added.

The euro is retreating from previous highs

In Europe, quotations fell 0.1% to 1.0867, and the euro fell slightly on Thursday after previously rising to its highest level since March 21.

Interest rates are widely expected to rebound from record highs in June, and markets are currently seeing up to three rate cuts this year or two after June, most likely in September and December.

“The 1.0900 level should not pose a very strong resistance if US data – such as today’s jobless claims – increases pressure on the dollar. However, a move to 1.1000 benchmarks appears premature given the still uncertain inflation picture in the US,” ING said.

fell 0.1% to 1.2675, with sterling giving back some of its gains from the previous session as it rose above 1.27 for the first time since April 10.

Interest rates are also expected to be cut this summer from a 16-year high, but recent stronger-than-expected GDP growth may delay this pending ECB action.

Yen sees slight gains after frail GDP data

In Asia, it fell 0.2% to 154.64, with the yen benefiting from dollar weakness, but the pair remained well above levels reached in early May when the government intervened in currency markets.

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The yen’s recovery stalled as data showed the Japanese economy contracted much more than expected in the first quarter, raising questions about how much room the Bank of Japan has to continue raising interest rates.

quotes were unchanged at 7.2187 as sentiment towards China remains frail after Washington imposed tighter trade tariffs on key Chinese industries such as electric vehicles, medicines and solar technologies.

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