The dollar index, a measure of the U.S. currency against six of its peers, was slightly higher at 104.03 as the market expects the consumer price index (CPI) for January – due to be released on Tuesday – to give the Fed further confidence that inflation is slowing towards its 2% target.
Retail sales for January, due out on Thursday, are expected to slip a bit also in a report likely to confirm decelerating inflation and cap rising Treasury yields and the dollar’s recent strength, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
“Soft CPI and soft retail sales should help boost the Fed’s confidence that inflation is coming back to its target,” Chandler said, adding that Fed Chair Jerome Powell was using the data to judge the outlook on inflation.
The euro fell 0.22% to $1.07595 as a holiday in most major Asian markets kept markets relatively subdued at the start of what could prove to be a busy week.
The euro was flat at $1.0784, falling from a 10-day high touched in early trading. A reading of the euro zone’s economic growth in the fourth quarter on Wednesday could provide fresh direction.
“While it won’t necessarily impact CPI dramatically this month, the most recent round of PMI (purchasing managers index) surveys showed prices increasing for 58.5% of respondents across the two surveys, suggesting that inflation could well tick up as we move into spring,” wrote Matthew Weller, global head of research, FOREX.com and City Index.
“This is no doubt a concern for the Fed, and may lead to a smaller-than-expected reaction even if this week’s (lagging) CPI reading comes in below expectations,” Weller added.
Changing expectations of when and how quickly central banks will cut interest rates as inflation falls are a significant driver of currency markets at present.
Strong jobs data this month has largely taken a Fed rate cut in March off the table, with markets seeing a move in May as somewhat more likely.
The U.S. data also caused market pricing for the first European Central Bank (ECB) rate cuts to be pushed back, even though economic data in Europe has been weaker.
Analysts expect U.S. core CPI to come in at 0.3% month-on-month in January, but a still elevated 3.7% year-over-year, according to a Reuters poll of economists.
Elsewhere, there is plenty of data due this week in Britain, including inflation and GDP numbers with the former, on Wednesday, similarly likely to influence opinion on when the Bank of England will start to cut interest rates. It is currently seen lagging the Fed and ECB.
Sterling was last trading at $1.26, little changed on the day.
Markets are also keeping an eye on the highly rate-sensitive yen, which strengthened sharply late last year as markets priced in early U.S. rate cuts, but has since weakened as that timing got pushed back.
Japanese authorities intervened in late 2022 to prop up the yen, which weakened to as much as 151.94 per dollar. The dollar was last flat against the yen at 149.28.
