US inflation data is set to take center stage in this week’s economic outlook, with all eyes on the Federal Reserve’s potential decision to cut rates. As a result, the dollar remained steady on Monday, as most major Asian markets were closed for the holiday.
The euro saw a slight decline, settling at $1.0778 after reaching a 10-day high earlier in the day. This follows a week of small gains after a period of steady declines in 2024. On Wednesday, the eurozone’s economic growth in the fourth quarter will be released, which could provide further direction for the currency.
Meanwhile, the pound remained flat at $1.2632, while the Japanese yen strengthened slightly to 149.04 per dollar. The approaching release of US Consumer Price Index (CPI) data for January on Tuesday has limited market movements.
The expectations of interest rate cuts by central banks as inflation decreases have become a significant driver of currency markets. Strong jobs data earlier this month has led to the belief that a March rate cut by the Federal Reserve is unlikely, with May now seen as the more probable timing.
Analysts predict that US core CPI will show a 0.3 percent month-on-month increase in January, while the year-on-year figure is expected to remain elevated at 3.8 percent.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, highlighted that the Federal Reserve wants more evidence that inflation will stay near the 2 percent target before considering a rate cut. She believes that persistently near-target inflation and a weakening labor market would provide them with the necessary evidence. Kong also stated that Tuesday’s data is unlikely to cause a significant decline in the dollar.
In addition to US inflation data, Wednesday’s release of British CPI inflation will also influence opinions on when the Bank of England will begin cutting interest rates. Currently, it lags behind both the Federal Reserve and the European Central Bank in terms of potential rate cuts.
The Japanese yen, which experienced a sharp strengthening at the end of last year due to expectations of early US rate cuts, has since weakened as that timing has been pushed back. Japanese Finance Minister Shunichi Suzuki stated on Friday that authorities are closely monitoring foreign exchange movements. Barclays analysts noted that the dollar/yen exchange rate will be primarily driven by US developments in the near future, but warnings of intervention are likely to increase if it reaches the 150 level.
It is worth mentioning that Japanese authorities intervened in late 2022 to support the yen, which had weakened to as much as 151.94 per dollar.
Overall, this week’s economic outlook revolves around the release of US inflation data and its potential impact on interest rate decisions by central banks. The currency markets are closely monitoring these developments, with expectations of rate cuts driving market movements.
