Dollar Steadies, Markets Await U.S. Inflation Data and Fed Decision

The dollar maintained stability early on Tuesday as the yen moved away from its one-month highs. Investors are gearing up for U.S. inflation data, which could influence the Fed's interest rate decisions. Mixed labor reports and upcoming U.S. consumer price index reports are key factors in market anticipation.

The dollar maintained stability in early trading on Tuesday, while the yen retreated from recent one-month highs, as investors geared up for U.S. inflation data and reconsidered their expectations for a significant interest rate cut from the Federal Reserve starting next week.

Friday's mixed labor report left markets uncertain about whether the Fed would opt for a standard 25 basis point (bps) rate cut or a more substantial 50 bps cut at its September 17-18 policy meeting. Traders are now looking ahead to Wednesday's U.S. consumer price index report for further policy guidance, with the Fed emphasizing employment over inflation in its decision-making. According to a Reuters poll, headline CPI is likely to have risen 0.2% month-on-month in August, unchanged from the previous month.

With non-farm payrolls data insufficient to support a 50 bps cut, market focus has shifted to the U.S. inflation data for clues on the Fed's rate-cutting trajectory, according to ING economists. "Economic growth is clearly losing momentum, and the markets are now focused on whether the economy will have a soft or hard landing."

Investors will also be tuning into the highly anticipated U.S. Presidential debate on Tuesday, which could significantly impact the November election. The dollar rose 0.1% to 143.30 yen, moving away from its one-month low of 141.75 hit on Friday, while Sterling last traded at $1.3061, near a three-week low.

The dollar index, tracking the U.S. currency against six major counterparts, stood at 101.69 after gaining 0.4% on Monday. Last week, the index fell 0.5% as traders adjusted their rate-cut expectations. The market is now fully pricing in a 25 bps cut next week, with a 50 bps cut at 30%, according to the CME FedWatch tool.

A weaker-than-expected CPI report could strengthen market bets for a 50 bps cut, while a steady reading may keep the debate unresolved, said Charu Chanana, head of currency strategy at Saxo. "USD is expected to trade sideways to higher, as current Fed easing expectations appear excessive."

Looking ahead to 2024, traders anticipate 110 bps of rate easing, up from 100 bps predicted in the three remaining meetings this year. Fed policymakers last week indicated readiness to begin a series of rate cuts, noting a cooling labor market that could worsen without policy intervention.

"The Fed is likely to opt for a 25 bps cut to avoid signaling panic, but may keep the door open for more aggressive cuts later in the year," Saxo's Chanana stated. Meanwhile, the euro remained stable at $1.10305 after dropping nearly 0.5% on Monday, ahead of the European Central Bank policy meeting on Thursday, where another rate cut is expected.

The emphasis will be on the central bank's messaging. In other currencies, the Australian dollar fell 0.13% to $0.6652, and the New Zealand dollar decreased 0.19% to $0.6133, both hovering near three-week lows.

(With inputs from agencies.)