(CTN News) – Dollar (USD) prices edged higher against the euro on Tuesday and fell against the yen as traders awaited inflation data on Thursday for clues about Fed rate cuts.
While bitcoin declined, it remained near its highest level since April 2022 due to expectations of a spot bitcoin exchange-traded fund (ETF).
In December, the dollar index fell to a five-month low as investors priced in a Fed rate cut sooner rather than later as inflation eased closer to its 2% annual target.
It has recovered from some of that weakness this year, with some seeing the selloff as overdone. Dollar movements will continue to be driven by Fed expectations, however.
The Fed pivots after weaker data continues throughout December, according to Bipan Rai, head of FX strategy at CIBC Capital Markets.
At this point, we’re pricing in a significant amount of easing from the March meeting, and the risk/reward is tilted a bit. There may be some market participants who are easing up on their dollar shorts initiated in December when they look at what’s priced in,” he explained.
When consumer price inflation is released on Thursday, it will be the main piece of economic data this week. A 0.2% rise in headline inflation is expected in the month and a 3.2% increase on an annual basis.
If inflation continues to moderate, it could boost expectations for a March rate cut, although if it comes in above expectations, it could also reverse some of that pricing.
According to CME Group’s FedWatch Tool, Fed funds futures indicate a 64% probability that rates will be cut in March, down from 70% a week ago.
Kamal Sharma, senior G10 FX strategist at Bank of America, predicts the Fed will start cutting rates at the March meeting: “The market is still trying to figure out the trajectory and timing of the first rate cut,” he said.
“Our base case scenario is for a soft landing, a lower dollar, and a bull steepening, which are all expected to support risk assets,” Sharma said.
At 102.37, the U.S. dollar index, which measures the currency against six other currencies, was up 0.07%.
In the euro-dollar exchange rate, the euro fell 0.05% to $1.09445, while the sterling rose 0.23% to $1.2719.
In December, Japan’s core inflation fell for the second straight month, alleviating some of the pressure on the Bank of Japan to exit its ultra-loose monetary policy.
For the dollar, the last price was 157.51 yen, down 0.26% from the previous day.
Earlier this week, bitcoin reached a 21-month high of $47,281 before falling 1.12% to $46,470.
On Monday, investment managers disclosed the fees they plan to charge for their proposed spot bitcoin ETFs, in another step towards approval this week by the U.S. Securities and Exchange Commission.