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Dollar Extends Gains Ahead of U.S. CPI Release

The dollar strengthened in early European trading Wednesday, extending recent gains ahead of U.S. inflation data which could influence Federal Reserve’s tapering thinking.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded around 0.1% higher at 93.097, hitting its highest level since the start of April.

USD/JPY rose 0.1% to 110.67, the highest since mid July, EUR/USD was largely flat at 1.1717, near a four-month low, GBP/USD was 0.1% lower at 1.3830, near a two-week low, while the risk-sensitive AUD/USD fell 0.1% at 0.7340.

The dollar has been on the rise of late, as improving U.S. labor data and a more hawkish tone from Federal Reserve policymakers have led markets to expect the central bank to begin tapering its asset purchases later this year.

Friday’s official U.S. jobs report impressed, with nonfarm payrolls rising by 943,000 in July and numbers for May and June also being revised higher.

Now the attention turns to the second leg of the Fed’s dual mandate, with the consumer price index for July due out from the Bureau of Labor Statistics at 8:30 AM ET (1230 GMT).

Analysts are looking for a gain in the headline figure of 5.3% over last year, marginally lower than June’s 5.4%, which was the biggest monthly gain since August 2008.

Core inflation, which excludes food and energy prices, is expected to have climbed 4.3% in July

from a year ago against the 4.5% jump in June, which was the quickest pace of increase since September 1991.

Fed Chair Jerome Powell has consistently said the elevated inflation numbers will turn out to be transitory as the economy fully reopens, but another high release could add pressure to the tapering debate.

Chicago Fed President Charles Evans took a dovish slant on Tuesday, saying the current inflation spike shouldn't push the Federal Reserve to tighten monetary policy prematurely, but he’s in the minority this week with a couple of his colleagues stating on Monday that inflation is already at a level that could prompt tightening.

“Markets would hardly be surprised over a sizzling inflation report in July,” said analysts at Nordea, in a note. “We expect core inflation around 4.8%, likely unhinging Powell and expediting the talk about tapering as early as in September.”

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